No, this isn’t a diary touting you to buy gold. I’m not Glenn Beck in disguise. This is a small story about a single commodity with little value in and of itself (except to jewelers) that I hope reveals a larger truth.
To begin, let’s go back to February 2001.
(Cont.)
Can anyone remember what the gold price was back then? I would be surprised if you could. Gold was as or near record lows in price (adjusted for inflation) trading in the range of $240 to $270. This was at a time the country was in or about to enter a recession, and stock prices as measured by the Dow Jones Industrial index (DJI) was trading roughly around 10,500. So even after the Tech stock bubble of the burst, gold was not considered a place to put your money.
Traditionally gold has been considered a hedge against inflation. That was certainly the case during the last year of the Carter administration when gold prices exceeded $850 an ounce in January of 1980 when inflation reached the level 13.5% (as inflation was measured at that time by the Bureau of Labor Statistics, which weighted “shelter costs” much higher than they do today). Gold is typically not viewed an investment vehicle except by individuals in the rare coins collectible market.
Yet today, as we speak, Gold is trading at or around $1,650 an ounce. The DJI, even after losing roughly 10% of its value over the last month, is still trading over 11,000 today. Inflation is low according to the government (obviously those of us who are most affected by energy, health care and food prices know that inflation is higher for those goods and services, but for the typical gold investor that wouldn’t be much of an issue). Based on these measures, since 2001 gold has outperformed the stock market dramatically, roughly 650% over ten years.
Of course it didn’t rise dramatically all at once. As late as December, 2005, gold had risen only to the $500 an ounce level. Still somewhat surprising but in light of 9/11 and the Iraq war, perhaps understandable. So when did gold really take off? It continued to trend upwards but July, 2008 marks the point in time when gold first approached the $1000 level. Yet, when the stock market lost half its value from October 2007 to February, 2009 – (DJI’s lowest point was 6547 in February 27, 2009 after a high of 14164 on October 9, 2007) gold rose from $740 per ounce to $955 per ounce. Still inexplicably high, but understandable at a moment when stocks seemed headed off the cliff.
Yet even after stocks recovered most of their lost value by early 2011 (i.e., DJI passed the 12,000 level in February of this year), Gold continued to climb despite supposedly modest inflation and a rejuvenated stock market. From the end of February 2009 to today, Gold rose from around $950 to $1650 per ounce, an increase of 174% in value in 29 months.
When did gold go from being an inflation hedge to an investment vehicle that outperformed the US Stock Market? What changed over the past 10 years?
Two words: Lower Taxes.
Yes, lower tax rates, and in particular for the rich and corporations dramatically altered our economic landscape. Obviously, the remarkable deficits, which doubled the national debt, would not have been possible without the government’s loss of revenue that President Bush and the Republicans created when they passed legislation (with some Democratic support) lowered the tax rates primarily for the benefit of the wealthiest individuals and corporations. Certainly the wasteful economic costs of our futile wars in Iraq and Afghanistan, the corruption and waste that was enabled by the Bush administration’s privatization efforts and the bloated Defense budget played a big part, but the largest single cause of those deficits is directly tied to Bush’s tax “reforms”. Indeed, reinstating the tax rates that existed in the last year of Clinton’s second term would lower the projected deficit by 75% over the next five years:
If Mr. Obama wins re-election, he could simply refuse to sign any budget-busting tax cut for the rich — who, after all, have received much larger pretax raises than any other income group in recent years and have also had their tax rates fall more. Republicans, for their part, could again refuse to pass any partial extension.
And just like that, on Jan. 1, 2013, the Clinton-era tax rates would return.
This change, by itself, would solve about 75 percent of the deficit problem over the next five years. The rest could come from spending cuts, both for social programs and the military.
We also know that job growth over the Bush years was the lowest ever coming out of a recession, and wages and salaries, except for the wealthy, remained essentially flat. Clearly, tax breaks for the rich did not encourage these so called “job creators” to create any new jobs. What did it do? It encouraged speculation. Speculation in collateralized debt obligations (CDO’s) sold by the fraudsters and con artists on Wall Street, and speculation in commodities. Investment on businesses that created jobs in America? Not so much.
Yet, does anyone here trust that the “Bush tax breaks” will be allowed to just expire? Neither do I. I would like to say I trust President Obama would allow those tax breaks to expire in 2013 should Democrats lose both houses of Congress and yet he retain the Presidency. However, the past two examples instances when he has negotiated with Republicans over fiscal matters, (a) the budget at the end of 2010 and (b)the debt ceiling this past month, indicate that in any future “negotiation” he will not insist on revenue increases and will instead accept larger spending cuts.
Indeed, his Defense Secretary, Leon Panetta, has already indicated that Defense cuts must be off the table in any future negotiation, with spending cuts coming from other programs. Passing mention was made to revenue increases, but an anonymous source at the Pentagon made it clear that cutting Social Security and other parts of our social safety net, and not Defense was the preferred way to proceed:
“I would expect them to focus on entitlement and taxes,” the senior defense official said, talking to reporters about the Super Congress, as the 12 members of the budget cutting committee are sometimes known. The Budget Relief Act gives those 12 people the authority to make $1.5 trillion in additional federal budget cuts. “I would hope they would not make further cuts in defense,” the official added. Pressed by reporters at a Pentagon briefing on whether pursuing tax increases and cutting entitlements was the department’s policy, the official did not demure.
Well we already know that the Republicans will not agree to revenue increases (i.e., allowing the Bush tax breaks to expire among other things). We know that because John McCain told us so. As has every other Republican you’ve ever heard on the subject.
People have been running to Gold out of fear. No one trusts the austerity plans our Financial overlords have insisted upon around the world to work (or if they do they’d be putting their money in the market today). No one with money to invest trusts the Americans, the Europeans or the Chinese to pull us out of the mess we allowed to occur over the last ten years when the Banksters ran wild. No one trusts the American government or its political leaders to get America’s financial house in order, stop being dysfunctional and create the recovery in jobs necessary to reignite a global recovery.
Quite the opposite. They expect us to decline as an economic power and ultimately as a military power as well. We are becoming Russia in the 1990’s, a country where everyone but the oligarchs and the political elites will have to make due with less. Oh its not occurring as quickly here as it did in Russia, but then we have farther to fall. The travesty of our rigged casino-style stock market has been exposed. Indeed, one could argue that its value is only being propped up by the Federal Reserve at this point.
Of course, its not like we don’t have the means to pull ourselves out of this slow moving disaster or a plan that we know would resolve the deficit crisis and bring jobs back. It’s all there in the Progressive Caucus’s deficit plan, the one nobody but the “not serious people” talk about:
Instead of permanently locking in place the Bush tax cuts in the wealthy, the Caucus budget would let those expire in 2012 and allow those rates to return to what they were during the Clinton administration. Under legislation introduced by Rep. Jan Schakowsky, there would be new 45 percent, 46 percent and 46 percent tax brackets for multimillionaires and billionaires. Also, capital gains income would be taxed at the same rate as regular income.
Instead of dismantling Medicare, as Ryan’s budget does, and throwing seniors into the private insurance market, where they would be forced to cover an increasing share of their health care costs, the Progressive Caucus would maintain the current structure and save significant costs by allowing Medicare to bargain with pharmaceutical companies for bulk rates, much as the Veterans Administration already does. Republicans have consistently opposed such a move.
Where the Ryan budget would cut infrastructure spending, close job training centers and limit funding for career education, the Progressive Caucus proposes spending $1.45 trillion in education, infrastructure, training, and research and development.
Instead of proposing increasing the Social Security retirement age or cutting benefits as Republican leaders have proposed, the Progressive Caucus budget would increase payroll taxes to the percentage of total wages they were set in the mid-1980s, when a bipartisan group crafted a compromise long-term Social Security solvency plan. Adjusting payroll taxes to cover 90 percent of taxable earnings, which was intended by that compromise, would alleviate nearly all of the concern about Social Security’s long-term solvency.
The only plan yet proposed that would eliminate the deficit in ten years, create a surplus, increase jobs, invest in infrastructure and education, and protect Social Security, Medicare and Medicaid, yet it has no chance of being brought up for a vote in Congress, much less passing. In short, our dysfunctional bought and paid for Congress and a President who says yes to Republicans as often than he says no to Democrats, make any discussion of this alternative to an endless repeat of the same “hostage taking” ritual we saw played out over the last six months impossible.
Republicans were fond of saying that 9/11 changed everything. The truth is that after 9/11 Republicans and their puppet-masters took advantage of the opportunity to change everything. They have seemingly locked in those changes for the foreseeable future. Our present situation is analogous to one where President Hoover and the money powers of his day had managed to put in place measures that ensured Republicans (or centrist Democrats like Al Smith) would continue in power, and continue to cut spending and seek a balanced budget rather than institute programs to create jobs after 1932.
In a sane world, Gold would be selling at a price no more than it did when Clinton left office. In a sane world, governments would be doing everything possible to create jobs and stimulate growth. In a sane world the opinion of the majority of Americans who support tax increases and the preservation of our social safety net would matter more than the cruel and mendacious politicians who currently serve only the interests of the wealthy and powerful and are perfectly content with seeing extended high unemployment, fewer benefits for the elderly and our veterans, dirtier air and water, and a corrupt and criminal gang of banksters in charge of Wall Street. But we haven’t lived in a sane world in quite some time.