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How To Find $288 Billion in Hidden Gold

martha.c.white — Wed, 04 Nov 2009 19:47:01 +0000

Just ask the Treasury.

Buried in the Treasury’s International Reserve Position report is an intriguing bit of math. The document details the total amount, by weight, of the Treasury’s gold reserves, plus a dollar value for said metal. But some fast division reveals something interesting: The Treasury marks the value of its gold at $42 an ounce, the price settled on in 1973, two years after the United States scrapped the Bretton Woods System, which had held gold at $35 an ounce for decades.

Wait, what? Spot gold is heading toward $1,100 per ounce, and the Treasury is embracing a Cold War relic of a price? If the Treasury’s bling were valued at the spot price, we’d be sitting on a literal gold mine of nearly $288 billion. Why doesn’t the Treasury account for the huge run-up in gold prices?

For starters, marking the Treasury’s gold to market would create a huge headache of an ever-fluctuating balance sheet as the price of gold rises and falls. Plus, if gold tumbled, we’d lose our hypothetical wealth as quickly as we’d accrued it.

More importantly, the United States isn’t selling its cache. Evaluating the Treasury’s gold for the market would be like putting a price tag on the White House or the Statue of Liberty—a possibly entertaining but pointless exercise. For the Treasury to say it suddenly has greater wealth in its coffers might make us feel better about the burgeoning deficit, but it doesn’t really change anything. For revaluation to have any economic impact, we’d have to sell.

And if the United States were to dump its gold on the open market, there’s no way we’d get today’s spot rate. Governments around the world collectively hold about 20 percent of the world’s gold reserves. Among these, the United States holds about one-third of that. Pouring it into the market would make prices crash. Even if the Treasury were to sell off gold a bit at a time, anticipation of future sales would exert a downward pressure on prices. Any transaction would also require deft political maneuvering and delicate negotiations, since other central banks plus the industry-backed World Gold Council wouldn’t be too keen on us holding a red-tag sale on our gold.

Raising the value of the Treasury’s gold stockpile would have an inflationary effect, too, which is the last thing the Federal Reserve wants right now. In 1933, then-President Roosevelt hiked the book value of gold from $20.67 to $35 an ounce to battle deflation. It did the trick, but the move was risky. Given that the Fed now has safer ways to create inflation, a revaluation and sale would come across as the powers that be playing fast and loose with a shaky economy.

There are certainly people who think the United States should unload some of its stash, on the grounds that the gold standard doesn’t work and by holding onto the metal, we’re clinging to a de facto version of an antiquated policy. Research papers, such as this one, argue that the wealth we keep locked up in gold coins and bullion would be better utilized if injected into the economy.

The problem, detractors argue, is that selling gold is a one-shot solution. Unlike raising taxes or cutting spending, you get to sell your gold only once. Yes, it might help us out of this slump, but we would have one less major asset to fall back on the next time the economy dives.

Explainer thanks James Barth of the Milken Institute, Michael Bordo of Rutgers University, Mark Calabria of the Cato Institute, and Dimitri Papadimitriou of the Levy Economics Institute of Bard College.

Did CIT Kill Christmas?

matthew.yeomans — Mon, 02 Nov 2009 09:04:12 +0000

The most popular day of the week to file for bankruptcy protection, troubled commercial lender CIT (CIT) once again proves, is Sunday. CIT filed for Chapter 11 on Sunday afternoon, doing so with the vast approval—some 90 percent, the Wall Street Journal reports—of its most influential debt holders. This is crucial backing if CIT is to reorganize itself, shed some $10 billion in debt, "and emerge with a new business model by year's end." Year's end may not be soon enough for some retailers. The critical Christmas season is just a few weeks away and CIT's uncertain future is putting even more pressure on small and midsize retailers. "The company provides badly needed credit to thousands of small and mid-sized businesses, and is a critical part of the flow of capital in the retail sector," the Associated Press reports. For example, about 60 percent of the retail industry suppliers rely on CIT credit, according to the AP. Another big loser in the CIT bankruptcy is you, the taxpayer. According to Bloomberg, "the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout."

There's some promising news for bailed-out mortgage lender Fannie Mae (FNM), however. The WSJ reports that Goldman Sachs (GS) is in talks to buy millions of dollars of tax credits from the government-controlled lender, but only if it can get approval of the Treasury for the transaction. The Treasury is saying there's no deal "unless it is clearly in the taxpayers' interest."

Treasury Secretary Timothy Geithner acknowledged on Sunday what you've no doubt been grumbling about for some time: Yes, the federal deficit is a tad high. He also thinks economic recovery is going to be a "little choppy," the Associated Press reports. "Asked repeatedly on 'Meet the Press' on NBC whether that meant taxes would rise, Mr. Geithner avoided providing specifics," the AP writes. Geithner did suggest, though, that those making less than $250,000 are safe. For now. CNNMoney.com notes, Geithner did not declare the recession truly over.

Bank of America (BAC) might be one of the biggest financial institutions in the nation, but running it doesn't appear to be a very attractive proposition, at least not for Bank of New York Mellon CEO Robert Kelly. The WSJ reports that Kelly has been sounded out a couple of times about taking over from outgoing CEO Kenneth Lewis, but the BNY Mellon head has shown no interest in the position. B of A's overtures reflect a growing belief among some shareholders, regulators, and directors that the next CEO should be "someone with no connection to the problems dogging the bank."

Last Friday's opening of China's new Nasdaq-style stock exchange is being heralded as a "watershed moment for the country’s capital markets," the NYT writes. Trading was feverish on the launch day of the Growth Enterprise Market, or GEM, with shares of some companies soaring as much as 210 percent. Up until now, many Chinese tech companies have lacked access to financing. That looks set to change with GEM, though some observers warn that the exchange could quickly fall victim to over speculation. It's like the “V.I.P. table on top of a big casino,” one analyst told the NYT.

And finally, can Newsday columnist Saul Friedman's name become a rallying cry for preserving the status quo of free online news? Friedman quit his writing gig last week "over the paper’s decision to require some readers to pay for access to its Web site," the New York Times reports. And how is Friedman's protest message playing out among the chattering masses? So far, we count, as of press time, just 20 tweets acknowledging his sacrifice for online readers everywhere.

bernhard.warner

matthew.yeomans

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Mon, 02 Nov 2009 09:04:12 +0000

Mickey Mouse’s Makeover

caitlin.mcdevitt — Thu, 05 Nov 2009 09:17:31 +0000

Disney’s (DIS) signature cartoon character Mickey Mouse is getting a makeover, says today’s New York Times. Concerned that kids these days aren’t connecting with the character as much as older generations did, the media and entertainment company is planning to update Mickey by making him edgier. The paper explains that in his new personality, “the formerly squeaky clean character can be cantankerous and cunning, as well as heroic.” The new version of the mouse will make his debut in a video game to be released next year called Epic Mickey. The redesign is a big move and one that the company is making cautiously, the paper explains: “Disney executives are treading carefully, and trying to keep a low profile, as they discuss how much they dare tweak one of the most durable characters in pop culture history to induce new generations of texting, tech-savvy children to embrace him.”

The Wall Street Journal reports that chipmaker Intel (INTC) now faces antitrust charges from the New York attorney general’s office. The suit accuses Intel of using threats and “billions of dollars in kickbacks” to persuade tech companies to use its products. The paper says, “Though the charges are familiar, the latest complaint increases the pressure on Intel, which has already paid a $1.45 billion fine to antitrust authorities in Europe and faces an investigation by the U.S. Federal Trade Commission.” This new complaint also brings to light e-mail correspondences between executives at Intel and other companies, as well as offering up estimates for just how much Intel may have paid to maintain business with its partners.

More than one-quarter of all businesses are owned by women, according to a report from the Center for Women’s Business Research discussed in the New York Times. The center’s report also revealed that a mere 4.2 percent of all revenue generated from U.S. businesses comes from those owned by women, and that only one-fifth of these businesses have employees. So while the seeds of leadership are there, women-owned business development still has a way to go. The paper says, “Armed with the new research, center officials and other women business leaders are approaching the Obama administration, the Small Business Administration and House and Senate small-business committee members to ask for more resources and new programs to support women-owned businesses.”

The Federal Reserve will most likely keep interest rates at near-zero for the next six months, the Financial Times says. While that's nothing new, the paper notes that the Fed has changed its tune ever so slightly, reporting that “[t]he US central bank tweaked guidance in its policy statement that had been unchanged since March, edging away from a simple forecast that it expects to keep rates at 'exceptionally low levels' for an 'extended period'—commonly understood to mean at least six months.” Now, the Fed has spelled out the conditions that could prompt it to raise rates earlier, including “low rates of resource utilisation, subdued inflation trends and stable inflation expectations.”

Automaker Chrysler, still building itself up since its government bailout and hasty partnership with Fiat, has embraced a softer tone, the New York Times reports. At a meeting yesterday, its executives spoke in a “subdued” and “understated” way about the company’s financials and future plans. “Many in the audience remarked on the decided lack of sizzle from an automaker that once sponsored a ‘Lingerie Bowl’ of women playing football in underwear,” the paper says. Sean McAlinden of the Center for Automotive Research told the Times, “They were the ones who mixed the drinks, wore turtlenecks and told all the best jokes. … They let the G.M. and Ford (F) guys wear the gray suits, but I guess things have changed.”

Finally, toys are the new Hollywood A-listers, according to the Wall Street Journal. The paper explains that as toys like Stretch Armstrong and the Transformers steal the spotlight in feature films, they’re increasingly getting treated like star actors in Tinseltown. “Toys now are receiving the same A-list treatment that any bankable movie star here has come to expect,” the article says. “That includes top billing and contracts with special perks. They even have their own talent agents.”

caitlin.mcdevitt

Are Payday Loans Really a Menace?

ray.fisman — Wed, 22 Jul 2009 20:16:03 +0000

The payday loan—which grants the borrower an advance on his salary, in exchange for interest payments—is an often villainized financial service. As Slate's Ray Fisman explains, many object to the sky-high interest rates attached to these loans and argue that lenders prey on ill-informed customers. But the lenders say that they help borrowers in need. Fisman parses the issue:

Payday lenders themselves argue that they're being victimized for providing a critical social service, helping the hard-up put food on the table and cover the rent until their next paychecks. Charging what seem like usurious interest rates, they claim, is the only way to cover the cost of making $100 loans to high-risk borrowers.

If payday lenders really do provide a much-needed financial resource, why deprive Ohioans and American servicemen of this service? A recent study by University of Chicago economists Marianne Bertrand and Adaire Morse suggests there might be a middle ground, by allowing payday lenders to continue making loans but requiring them to better explain their long-term financial cost. In a nationwide experiment, Bertrand and Morse found that providing a clear and tangible description of a loan's cost reduced the number of applicants choosing to take payday loans by as much as 10 percent. Better information, it turns out, may dissuade borrowers vulnerable to the lure of quick cash while maintaining the option of immediate financing for those truly in need.

Follow the link to read more about payday loans.

ray.fisman