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FORBES PREDICTS DOLLAR LINKED TO GOLD AGAIN | June 02, 2011 (0 comments)
Carlsbad, CA—Businessman and former presidential candidate Steve Forbes was the opening keynote speaker for the fifth GIA International Gemological Symposium, held here Sunday and Monday, May 29-30.
“People are calling this [economy] the ‘new normal,’ but it’s really the new abnormal,” began Forbes, addressing a packed house. "The economic conditions we’re experiencing can be compared to a temporary throwback to conditions similar to the 1970s, and, to a lesser degree, the grimmer 1930s.
“The U.S. economy is expected to grow a little more than 3% this year, and it’s expected that 2.5 million jobs will be created,” he said. But, he said, that’s a poor performance by U.S. standards, and it’s the first time we’ve seen such a slow recovery from a recession.
In the 1970s, we had three recessions, but each had a quick snapback, then the economy hit a wall, prompting another recession, until the 1980s boom, which began in the United States and spread to the world.
Today, the economy is facing some headwinds keeping the recovery slower than we’d like. First of these is monetary policy.
“If you want to end a bad date quickly or get rid of a talkative seatmate on an airplane, just start talking about monetary policy,” joked Forbes, a self-confessed economic wonk.
He compared monetary policy to the fuel in an automobile. Not enough, and the car stalls; too much and the engine floods and it also stalls. It’s a delicate balance of fuel and air.
The Federal Reserve has been on a bender, printing too much money, he said. This creates a weak dollar and drives commodity markets up. “We cannot have a sustained recovery with a weak dollar.”
Money should be stable in value, and if it isn’t, commodity prices rise, he explained. “We saw this in 2003-2004, when the price of gold, coal, wheat, soybeans, everything went up.” A situation like that holds back production and encourages speculation, which makes it very hard to determine how much of the price surge is real and how much is driven by speculation or hedging.
We live in a world that is very united economically, he said, citing as an example the popular iPhone. The device contains parts and intellectual property from all over the world. To make trade easier, we need a global currency, and in fact we have always had a de facto global currency. In the 19th century it was the pound; today it’s the dollar.
Gold standard returns? In a bold prediction, Forbes said, “Five years down the road, I believe we will see the dollar re-linked to gold.” But it won’t be the traditional gold standard of the 19th and early 20th centuries, he said, it will be a more modern version wherein gold is used more like a “north star” guide for a compass.
He used the current price, $1500, as an example, emphasizing that the number is not his prediction, only an illustration. “If $1 is linked to $1,500 gold, when gold rises above $1,500 you tighten up the money supply. If it goes below, you loosen it.
The second headwind he cited was government spending.
“Where does the money come from?” he asked. “You can’t just keep printing it.”
But he doesn’t advocate a draconian solution, either. “In a time when we have to practice austerity, we also have to put in measures to get the economy moving again.”
This led into his favorite topic—and part of his former campaign platform—flat-rate tax. He used as an example of both Greece and Russia. Greece, as we all know, is in dire straits financially, and the country needs to seriously tighten its belt—but to increase taxes at this time also would be wrong. Instead, he said, the country needs to simplify its very complex tax code, which will in itself generate more revenue. He pointed to Vladimir Putin’s strategy of implementing a 13% flat tax in Russia, which, he said, was surprisingly effective.
“The U.S. Constitution has 7,200 words. The Declaration of Independence has only 1,500 words. The Judeo-Christian Bible has 773,000 words. The tax code has 10 million words!
“Simplify our taxes, don’t raise them!” he said. He believes this will generate significantly more revenue than the current tax code. He advocated taxing all income over $46,000 at a flat 17% per year, eliminating the death tax (which drew a hearty round of applause from an audience comprised mostly of small business owners), and, when questioned in the Q&A session following, said yes, the flat tax should also be levied on major corporations as well as everyone else.
After Forbes’s address, GIA president Donna Baker led a Q&A session. “What effect will a gold-to-dollar relationship have on commercial use of gold, and also on developing nations?” she asked.
Forbes replied, “I believe it will make life infinitely easier [for users of gold] if they knew what their costs would be. For developing countries, it would be wonderful. Capital goes where it’s welcome, and stays where it’s well treated.
Baker next asked, “Wealthier consumers in the United States and Europe are increasingly concerned about responsibility and where something is made. Do you see the trend with consumers in other regions?
“Diamonds, like money, are fungible,” replied Forbes. “It’s harder to tell whose hands are on it. But when there’s turbulence, don’t just wring your hands and not buy. Focus on the conditions, not the product. Just focusing on the product doesn’t change the bloody underlying conditions.”
Baker’s final question was one of investment issues. In the Middle East and other countries, she said, people are buying large diamonds in case the government grows unstable, and did Forbes see this spreading?
“If you’re buying gold as an insurance policy, do not get into the market unless you know how to play the game,” he said firmly. Otherwise, you will lose your shirt.
“Life is going to throw curveballs. The essence of leadership is how you anticipate them and how well you manage through a crisis,” he said. He cited Bank of America as an outstanding example—it was founded around the turn of the 20th century, when there was a huge influx of immigrants to America. No existing banks wanted to serve the immigrant community, so an enterprising Italian immigrant founded an institution called the Bank of Italy, which was quickly changed to Bank of America, and was the place to go for immigrants to get business loans. It faced a number of challenges—not least of which was ensuring it would remain open during the Great Depression—but it not only survived, it is today the largest bank in the nation.