Blogs: Kelly Hanlon
Auction houses posted substantial sales gains last year due, in large part, to the increasing value of rare art work. The Wall Street Journal reported gains of 14% for Christies International over the prior year while Sotheby’s reported increased art sales of 14.5%. Art values, overall, posted gains of more than ten percent last year. The top ten priciest pieces sold by Christies ranged in price from $22.5 million to more than $43.2 million.
While global markets and sovereign nations teeter on the brink of insolvency, why are investors purchasing rare works of art at record-setting prices?
As Lewis E. Lehrman has explained, when the dollar—the world’s reserve currency—loses its value, investors flee to other articles of wealth in an attempt to find a stable store of value over time. Since the dollar has lost more than eight-five percent of its value over the last forty years—and its declining value shows no sign of abating—investors are rationally attempting to find enduring stores of value. So they invest in things like art during periods of economic turmoil.
There is a way to reverse this trend, unleashing vast stores of capital for productive economic use which would benefit all market participants. Restore the dollar of the Constitution, once again establishing dollar convertibility to gold by law.
Advisor to TheGoldStandardNow.org James Grant draws a useful Constitutional analogy between the limitations of the judiciary and the Treasury. In Money of the Mind, Grant writes, “…the gold standard was the rule of law applied to money. As the Constitution restricted the freedom of action of the Justice Department, so did the gold standard curb the activities of the Treasury. Bound by the legal definition of money, the government could not print its way out of a jam.”
Today, however, neither the Treasury nor the Fed abide by the legal definition of money set out in the Article I of the Constitution. Instead, they “create money out of thin air,” injecting billions of unwanted dollars into the world economy. Because these dollars are not a result of true economic growth—that is, demand does not exist to offset their supply—over time these newly created dollars tend to cause inflation at home and abroad. Through this grotesque mechanism, all prices rise—including the prices of things like art and gold.
According to Professor Larry White, “with dollar inflation risk dramatically reduced, the dollar-inflation-hedging demand for gold…will fall dramatically. [This] effect is likely to dominate, seeing that hedging demand is the main reason why the real price of gold is higher now than it was when the United States abandoned the last vestiges of gold redeemability in 1971.”
Today’s paper dollars with their ever-declining value create hedging demand—and encourage speculation. Hence, the record-setting year in sales of rare artwork from Cezanne’s The Card Players to self-portraits of Andy Warhol.
The long-term solution to such speculation (or what Dr. White refers to as hedging demand), proposed by Lehrman and recounted by Grant, is elegant in its simplicity. “The world must return to gold…and the Federal Reserve must stop its frenetic buying and selling of government securities. It must throw in the towel on trying to control the nation’s money supply, which it could not even count.”
After its first season, Gold Rush became one of cable television’s most watched shows. The reality TV series followed a group of mostly out-of-work miners to a gold claim in Alaska as they risked everything in an attempt to strike it rich. This winter the second season debuted and proved as interesting as the first. From the mechanical challenges posed by aging equipment to the environmental difficulties of working in a new region—the Klondike—Todd Hoffman and his crew continue their pursuit of gold.
The Discovery Channel expanded its programming this season with another series on gold mining. This time, however, the search for gold takes place in the frigid waters of the Bering Sea off the coast of Nome, on the west coast of Alaska. At the beginning of each episode, one of the old-time miners delivers a simple message, saying, “Let me tell you about gold. Gold makes the world go ’round. But gold doesn’t come easy. Gold…it’s right out there…right under the water.”
Men—and a few women—from around the world descend on the tiny, isolated sea-front town each summer and the harsh realities of dredging the floor of the one of the world’s most ferocious seas begin to take shape. The dredging rigs themselves are at once ingenious and dangerous. Built from spare parts, each rig looks like a collection from the local junk yard rather than the sophisticated machinery it is, ably separating dense gold particles from the gravel and silt on the sea floor.
One also begins to appreciate the extreme costs of this endeavor—there are greenhorns aplenty who have poured their lifetime savings into their rigs, hoping to strike it rich. There are seasoned miners who know that every day of the short mining season—ninety days in length—make up one percent of their annual income. And, then there are the truly human costs. The families left thousands of miles away; hours spent in 45-degree waters operating the suction equipment that lifts the gold off the sea floor; and, the injuries that are a real inherent risk.
So, why for centuries have people set off to faraway places, often risking everything, to find gold? Why in the twenty-first century has the Discovery Channel invested in following these miners to the ends of the earth? Why are Americans tuning in on Friday nights to watch these shows, making them hits?
The answer is quite simple: gold has been recognized for millennia for its inherent value. Indeed, the Discovery Channel reports in Ten Surprising Facts about Gold that, “Historically, [gold’s] worth has been stable. From 1833 to 1918, for example, the price of gold never rose more than six cents from its initial price of $18.93 per ounce, and between 1933 and 1967 its price rose just 26 cents per ounce, despite dozens of inflationary crises and economic downturns.”
This stability over time is one of the attributes which makes gold an excellent monetary standard. Like the yardstick which retains its measure of 36 inches over time, gold (unlike the paper dollar) retains its value over long spans of time. Gold—that most stable and sound precious metal, universally recognized for its inherent value—is the monetary standard on which our country was built.
In the ten days between the South Carolina primary won handily by yet another GOP presidential candidate and the next primary to be held on January 31 in the Sunshine State, economic and political winds were frenzied.
The IMF declared that there is a greater threat of a second, double-dip recession. As reported by the Washington Post, the IMF said,
Meanwhile, Forbes columnist Agustino Fontevecchia, reported on the first-ever, post-FOMC press conference during which, “…Fed Chairman Ben Bernanke recognized his zero-interest rate policy hurts savers. Bernanke made it crystal clear that his intention is to make people spend, practically telling savers to get out there and invest. The Chairman also said QE3 is still on the table, while he disregarded Republican criticism of the Fed as ‘political rhetoric.’”
As to political rhetoric, this week saw two more debates—the 18th and 19th—as the four remaining GOP presidential candidates tried to distinguish themselves from one another and from the incumbent president. Gingrich and Paul—representing half of the Republican field—found a bit of common ground on the economy and monetary policy during the January 23rd debate. Gingrich even called for the establishment of a gold commission, naming Lew Lehrman and Jim Grant as co-chairs.
In an exclusive interview with Lou Dobbs following Mr. Gingrich’s call for a 21st century gold commission, Mr. Lehrman pointed out the failures of the Federal Reserve System, including the inability of the Fed to maintain dollar stability over the long run. Indeed, the average wage-earner has seen the value of his wages erode by 85% since 1971 when the last vestiges of a gold-backed dollar were eliminated unilaterally by President Nixon.
Later in the week, David Malpass connected the economic rhetoric of the week with the political maneuvering, consistent with Lehrman’s view that “Obfuscation on the dollar works fine for Wall Street, which reaps billions in profits from the Fed's unstable dollar policy.” Malpass argued that, “Dollar weakness doesn't work at all for economic well-being. The corollary to the Fed's policy of manipulating interest rates downward at the expense of savers is declining median incomes.” Malpass continued, “When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.”
All the while, Mr. Obama in his annual State of the Union Address used political rhetoric artificially (and unnecessarily) dividing the nation between the haves and the have-nots—seating Warren Buffett’s secretary next to Mrs. Obama. What Obama, the Fed, and other academic and policy elites have failed to understand, however, is that their cheap-money policies have widened—and continue to widen—the very economic inequality which they rail against.
At the conclusion of the week, New York Times best-selling author and Wall Street Journal columnist, Peggy Noonan described this political season as the “most volatile and tumultuous…of our lifetimes.” She went on to say that “…it's left almost everyone…scratching their heads: what the heck is going on? We are in uncharted territory.” Noonan’s account of politics—“volatile,” “tumultuous,” and “unchartered territory”—could have just as easily been describing recent economic events.
One question remains, however, in the final hours before the Florida primary: what policy (or policies) will ease both our economic woes and the political unrest?
Lew Lehrman convincingly reasons that the gold standard is a major component in answering this very question. In a recent interview, Lehrman argued
If ever there was a time for a president to restore the confidence of the American people in their government, it is now.
Today’s policy makers—particularly Ben Bernanke and Barack Obama—are students of the economic and political history of the 1930s.
Federal Reserve Chairman Ben Bernanke authored a paper in 1983 on the cost of credit intermediation (i.e. cost of transferring funds from savers to borrowers) during the Great Depression. He found that recovery corresponded with the rehabilitation of the financial system. The increased cost of lending translated into the fewer loans which resulted in consumers reduce their demand for goods and services which in turn reduced aggregate demand.
Once the 2007-09 recession took hold, Mr. Bernanke was quick to take action so as not to repeat the policy mistakes of the 1930s. His 1983 argument foretold of the policies of the Fed under his leadership. At all costs, Mr. Bernanke sought to avoid credit markets seizing up. Many, many never before seen policies were implemented to provide liquidity to the markets. Of those, quantitative easing and interest rate policies are two of the most profound. However, economic woes have not ceased even after two rounds of quantitative easing—with a third under consideration—and with interest rates held at record lows for extended periods
All the while, President Obama has been working to enact the “New” New Deal with a series of entitlement programs, infrastructure projects, and an overhaul of the tax system. Treasury Secretary Geithner has been financing the President’s massive new expenditures with newly created dollars, while increasing the national deficit by more than $1 trillion annually.
Although the mechanisms and specific policies have changed slightly in the seventy five years between the two recessions, the outcome of our current recession remains to be seen. Writing in The Economist, Zanny Minton Beddoes compared 2012 with 1937. Beddoes writes, “There will be parallels with 1937, when a wrong-headed tightening of fiscal and monetary policy dragged down America’s economy and extended the pain of the Depression. The details are different, but in 2012, too, avoidable errors will ensure that the Great Stagnation lasts far longer than it needs to.”
As to the forecast for 2012? Beddoes predicts that 2012 will be the year of “self-induced stagflation” with “the most likely outcome [being] an economy not quite weak enough and a crisis not quite large enough to galvanize spineless politicians.”
Franklin Delano Roosevelt won the 1932 presidential election by a landslide—472 electoral votes to Hoover’s six. For four long months, Hoover lay impotent as commander-in-chief while FDR had not yet assumed power. All the while, the economy lay in tatters—unemployment had reached 25% and GDP continued its long downward spiral.
FDR took the oath of office on March 4, 1933. The following day, Roosevelt declared a weeklong national banking holiday to stem the flood of bank runs. Within a month’s time, FDR signed Executive Order 6102 which prohibited private citizens from holding gold, criminalizing and penalizing anyone who maintained gold for private use. The Gold Reserve Act of 1934 would further this executive order by making so-called gold clauses in contracts unenforceable. And, thus began the administration which would implement the policies that collectively came to be known as the New Deal. At the time, they were the most expansive (and expensive) federal policies in the nation’s history.
FDR summarized his economic accomplishments of his first four years in office during his second inaugural address—the first ever in January—delivered 75 years ago today. He said that “practical controls over blind economic forces and blindly selfish men” had been found. By 1938 as another severe economic downturn loomed over the nation and as major fiscal initiatives like social security taxes and minimum wage legislation took effect, FDR would change his rhetoric again, no longer describing his policies as those aimed at “recovery”—which had proved elusive to the Hoover administration—but rather as policies aimed at “relief.”
In an era when the “New” New Deal is often discussed, the economic legacies of FDR’s administration—including the monetary and fiscal policies he pursued—continue to be hotly debated.
BY KELLY HANLON: