Friday, July 15, 2011

Gold Rush

World economic uncertainty is fueling a flight to gold that shows every sign, experts say, of accelerating. My brother Bill sends along a column by Ambrose Evans-Pritchard at the British Telegraph which is full of foreboding. Here are a couple of salient lines from the column:
"It is very scary: the flight to gold is accelerating at a faster and faster speed," said Peter Hambro, chairman of Britain's biggest pure gold listing Petropavlovsk.

"One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money."
As a point of reference gold is presently selling for just shy of $1600 an ounce and silver is at about $39 an ounce.

QE3 would be the third round of an infusion of dollars (actually electronic credits) into the money supply to buy government debt which we're going to have more of because the president and his party refuse to stop spending money we don't have. The more money the Fed pumps into the economy the less it'll be worth and the more people will look to convert their rapidly depreciating dollars into something that will hold its value.

Evans-Pritchard leaves us with this observation:
Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point." The Swiss parliament is to hold hearings on a parallel "Gold Franc". Utah has recognised gold as legal tender for tax payments.
This is an indication that people around the world are losing confidence in the American government's willingness and ability to properly manage its economy. The rush to gold means a loss of faith in the dollar and there's no other currency right now to take its place.

Drone War

One of the frequent objections to the use of predator drones and their armaments to dispatch terrorists in Pakistan is that all we're doing is alienating the local tribesmen and thus creating more recruits for the terrorists. Strategy Page, however, offers a very different perspective on this:
While the Islamic terrorist groups in Pakistan's tribal territories are not happy with the six year CIA decapitation (kill the leaders) campaign, many of the local tribesmen are. Attacked by Predator and Reaper UAVs, armed with missiles, the terrorists (al Qaeda, Taliban and the Haqqani Network) have lost over 40 senior leaders in the last six years, most of them in the last three years. These losses are not only bad for morale at the top, but are seriously disrupting terrorist activities.

The locals love this, because the Islamic radicals have been nothing but trouble. For one thing, the radicals come across as a bunch of self-righteous bullies, and use their weapons to intimidate, or kill, anyone who crosses them. This includes coercing families to provide daughters to be wives of bachelor terrorists.

Then there is the terrorist tactic of using civilians as human shields for protection from the missile attacks. Here's where the CIA won hearts and minds, by scrupulously avoiding casualties among the innocent tribesmen. Moreover, the tribes eventually drew the line on human shields, bringing out their own guns and forcing the Islamic radicals to back off on hostages.

The locals also abandoned their compounds when the terrorists came by to spend the night. If the CIA hit the compound (after noting how the owners fled), the tribesmen blamed the Islamic radicals, not the CIA, for the damage.

The Islamic radicals know that the tribesmen have been cheering, not so much for the CIA, as against the radicals, but don't make an issue of it. On the surface, everyone is a good Moslem. But the local Moslems make no secret of wishing that the super-Moslems would go somewhere else.

The Afghan Taliban have created the same animosities, and American troops have long noted the pleas from local civilians to kill the local Taliban. This was often a matter of life and death for these civilians, because the Taliban would, if they were still alive after foreign troops left the area, come back and kill any civilians they believed had helped the foreign soldiers.
As with the war against al Qaeda in Iraq everyone benefits when one of these brutal thugs is eliminated and even though indigenous Muslims may prefer that it not be infidels to whom they should be grateful, evidently they're still glad that the infidels are doing it.

Wimpy's Bargain

Karl Rove has written a very helpful piece on the debt ceiling crisis for the Wall Street Journal. He clears away a lot of the fog about what exactly would happen if the situation remains unresolved come August 2nd:
President Barack Obama and Congress face a mess if the federal government hits the debt ceiling Aug. 2. The Bipartisan Policy Center, a Washington think tank, projects that the government will receive $172 billion in revenues between Aug. 3 and Aug. 31, but it is on the hook to spend $306 billion, leaving a shortfall of $134 billion.

On Tuesday, Mr. Obama told Scott Pelley of CBS News that "there may simply not be the money in the coffers" to issue Social Security, veterans and disability checks after Aug. 3.

Not so. The $172 billion in revenues collected over the rest of the month can pay the $29 billion interest charges on the national debt, Social Security benefits ($49 billion), Medicaid and Medicare ($50 billion), active duty military pay ($2.9 billion), Department of Defense vendors ($31.7 billion), IRS refunds ($3.9 billion), and about a quarter of the $12.8 billion in unemployment checks due that month.

There will, however, be no cash for highway construction, no checks for federal workers or retirees, no agriculture payments, no open national parks. Interest rates are also likely to rise if U.S. debt is downgraded, adding massively to the deficit and further damaging the economy. This would be a disaster with no political winners.
So what's preventing our leaders from arriving at a solution? The Republicans want spending cuts in return for raising the debt ceiling. The Democrats want tax increases in return for agreeing to spending cuts:
The president wants a $2.4 trillion debt-ceiling increase to get him past next year's election—and the deal he's proposing is based on promised future cuts paired with substantial tax increases on households earning more than $250,000 a year.
This means that it's not just millionaires and billionaires whose taxes would rise, but thousands of small businesses working on tight margins would have their costs go up as well. This would inevitably lead to higher unemployment and more business failures. This the Republican negotiators refuse to agree to, and even though Mr. Obama is willing to agree to spending cuts in exchange for his tax increase there's another problem:
[T]he $4 trillion in deficit reduction that Mr. Obama talks about is shy on details. No one who's attended his frequent negotiating sessions knows what his proposal really is.

The president has made a bipartisan agreement even more difficult by declaring certain spending off-limits to cuts. Mr. Obama's "untouchable" list includes his $1 trillion health-care reform, $128 billion in unspent stimulus funds, education and training outlays, his $53 billion high-speed rail proposal, spending on "green" jobs and student loans, and virtually any structural changes to entitlements except further squeezing payments to doctors, hospitals and health-care professionals.

Republicans have wisely declined. Demanding the GOP vote for immediate tax increases that would be offset by vague, future tax cuts conjures up images of Charlie Brown, Lucy and the football. The tax increases would be real—the future tax rate cuts would be imaginary.
The Democrats complain that the Republicans are not willing to compromise by raising taxes, but why should they? Tax increases would only worsen the economy and it's profligate spending that got us into the mess in the first place. Why, then should we not just cut spending?

The president offers what might be called the Wimpy (of the old Popeye cartoons) bargain - he'll gladly pay us on Tuesday (spending cuts) for a hamburger (tax increases) today, but giving Mr. Obama the hamburger just fattens government even more and there's no guarantee that Tuesday will ever come. Some deal.