Gold Vs. US Dollar
Gold has always allured the human species. From the early days of civilization humans have sought and fought for it. It is still a precious finite resource that serves as a store of value. Gold is often used as a safe haven for decreasing currency. This past week due to the political banter over the budget and the debt ceiling we saw a rapid rise in gold where the metal broke a record at $1,637.50, and a decrease in the US dollar. Then, as the week went on, a decrease in gold and a rise in the Swiss Franc, a better safe haven due to the country's low sovereign debt, as reported by Bloomberg.
This week we also saw many debates regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act. America’s first major financial market-crash occurred in 1929, resulting in the implementation of the SEC, (Security and Exchange Commission Act) the governing securities body. In 1933 the SEC passed the first laws to regulate the markets and to avoid another crash. The recent crash in 2007 spurred new changes and gave rise to the creation of the Dodd-Frank Act in 2010. The act looks to impede big banks from getting “too big to fail” and tries to protect consumers from the predatory industry. The act also forces banks from misusing speculation, which means closing shop on in-house proprietary trading. The act also forces hedge funds to register with the SEC and regard themselves as investment advisors. The hedge funds loved the secrecy that came with their territory; it allowed them to keep priority information on trades; thus, keeping their strategies intact. The new laws have pushed managers such as George Soros and his Quantum fund to become private as well as many others.
The debt-ceiling ”crisis” remains at the top of economic discussions both globally and domestically. What may appear to be a gritty debacle in Washington has so many ties to the fiscal health of the United States and the world, the macro and micro. For those that may not know, the United States currently has a debt ceiling of $14.3 trillion. However, the Obama administration is advocating that the ceiling be raised by $2.4 trillion to $16.7 trillion. Interestingly enough, the debt ceiling has already been hit, since May to be precise. The country also has reserves that can be effectively managed and manipulated after August 2 (the deadline) to ensure a few weeks of effective fiscal sufficiency. Nonetheless, with long-term foresight, something has to be done. Although the concept of raising the ceiling now appears to be an easy and quick decision, it should be mentioned that an outright increase is not the only solution to ensure that the country does not default on its obligations. On Friday night, July 29, speaker of the House John Boehner submitted a revised bill, a healthy alternative, which received majority vote in the house but was quickly smashed by the Senate. The significant characteristics of the Boehner bill are that it looks to encourage a staggered increase in the debt ceiling over a year and it fails to mention the retraction of armed forces from Iraq and Afghanistan as a possible solution for budget cuts. Medicaid, Medicare and Social Security remain as key items to be modified and accurately managed on the budget on Boehner’s bill. Stocks plummeted severely this week at the hand of discussions between both parties.