Gold-standard Debate Back

Exactly 40 years ago, the U.S. dollar formally became a fiat currency, as then-President Richard Nixon "closed the gold window" and ended the greenback's precious-metal guarantee. And though a market price for the dollar was soon accepted as the new normal, the debate over a return to the gold standard has now resurfaced in a way we haven't seen in forty years.

Many practical hurdles to a gold dollar exist — most significantly the tremendous difficulty in defending a metal-backed currency, even if the new gold standard opened with a major devaluation for the U.S. unit. But putting that aside, the debate itself is interesting and echoes the previous major gold controversy in the late 19th and early 20th centuries.

Feelings were intense on both sides, as witnessed by 1896 Democratic presidential candidate William Jennings Bryan's famous speech decrying what he saw as Republican attempts to "crucify mankind upon a cross of gold."

Today, the debate is equally heated. Those calling for a return to gold — the minority in this modern debate — deride those opposed to such a move as "sheeple" (sheep-like people) who blindly trust in their governments and refuse to see that the world's central banks have devalued the dollar and other major currencies into irrelevance.

Meanwhile, those who dismiss a gold standard as impractical see its supporters as "Ayn Rand wackos" (in reference to the author/philosopher popular with some gold supporters), praying for the economic apocalypse as they clutch their bullion with sweaty hands.

Of course, while the heavy passions in the current debate seem to match those from a century earlier, we can see at least one thing that has changed since Bryan's days: the role of the banker in the great gold debate.

In 1896, bankers were seen as widely favoring retaining the gold standard. Adding silver — as Bryan and the "free silver" Democrats called for — was seen as an inflationary move, which would punish lenders (the banks) and help borrowers (particularly farmers). Bryan's "cross of gold" speech made reference to the plight of the indebted farmer.

Today, however, the banker is the enemy more often cited by the pro-gold camp. Some of those seeking a gold standard say, for instance, that U.S. quantitative easing has adulterated the dollar to the benefit of financial firms, and that the banking industry is the guardian of the fiat currency system.

Japan's Economy Shrinks Less Than Expected

Japan's economy contracted less than what was estimated by economists as reconstruction work limits the slump from the record earthquake and tsunami on March 11. Gross domestic product shrank at an annualized 1.3 percent rate in the three months ended June 30, marking three consecutive quarters of declines, the Cabinet office said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a 2.5 percent drop.

Finance Minister Yoshihiko Noda said today that the world's third-biggest economy will probably resume its expansion this quarter after pledging yesterday to take "bold action" to curb yen gains if necessary. The nation's former top currency official Eisuke Sakakibara said today Japan's currency may rise to a postwar record, threatening the profits of exporters from Toyota Motor Corp. to Sony Corp. just as global growth slows.

"The headline number is better than expected, but it's not like this is a strong number," said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. "The strengthening yen will start to weigh on exports and capital spending. We can expect positive growth in the third quarter, but the yen may damp that momentum."

Japan's benchmark Nikkei 225 Stock Average rose 1.4 percent to 9,086.41 at the 3 p.m. close in Tokyo. The yen traded at 76.89 per dollar and has gained 5 percent against the U.S. currency in the past three months. Authorities sold the yen for the first time since March this month as it approached a high of 76.25.

A 15-yen change in the dollar-yen rate over the past year has "blown off" 300,000 yen, or $3,900, in profit on a $20,000 car, and a stronger yen has cut Toyota's fiscal first-quarter operating profit by 50 billion yen, Takahiko Ijichi, the carmaker's senior managing officer, said on Aug. 2.

A stronger currency makes Japanese products less competitive abroad and erodes overseas profits repatriated into yen. The yen has been stronger than the 82.59 average rate on which companies have based their profit forecasts, according to a quarterly Bank of Japan survey of business activity.

"The exchange rate is at a level that has an extremely damaging effect on the Japanese economy," Osamu Masuko, president of Tokyo-based Mitsubishi Motors Corp., said Aug. 4 after authorities intervened in the foreign-exchange market for the first time since March. "The resulting exchange rate still isn't acceptable."

Slower overseas growth may also weigh on demand for Japanese products. Tokyo Electron Ltd., the world's second- largest maker of semiconductor equipment, cut its net income forecast for the year ending in March by 49 percent to 34 billion yen ($442 million), citing lower than expected sales.

Rates on 15-year Mortgage Hit Record Low

Mortgage rates hit new lows this week, as worries about European debt markets drove investors to U.S. Treasurys, Freddie Mac's chief economist said on Thursday.

Rates on the 30-year fixed-rate mortgage averaged 4.32% for the week ending Aug. 11, the lowest the rate has been in 2011, according to Freddie Mac's weekly survey of conforming mortgage rates. The mortgage averaged 4.39% last week and 4.44% a year ago.

Meanwhile, 15-year fixed-rate mortgages, as well as 5- and 1-year adjustable-rate mortgages, hit record lows this week.

Fifteen-year fixed-rate mortgages averaged 3.5% this week, down from 3.54% last week and 3.92% a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 3.13%, down from 3.18% last week and 3.56% a year ago. And 1-year Treasury-indexed ARMs averaged 2.89% this week, down from 3.02% last week and 3.53% a year ago.

To obtain the rates, the fixed-rate mortgages required payment of an average 0.7 point, while the adjustable-rate mortgages required an average 0.5 point. A point is 1% of the mortgage amount, charged as prepaid interest.

"Renewed market concerns about the European debt markets led investors to shift funds into U.S. Treasuries, pushing long-term yields lower," said Frank Nothaft, vice president and chief economist of Freddie Mac, in a news release.

"Further, in its August 9th Federal Open Market Committee statement, the Federal Reserve noted that economic growth so far this year had been considerably slower than it expected and that overall labor market conditions had deteriorated in recent months, leading the Committee to conclude that an exceptionally low federal funds rate should be maintained at least through mid-2013.

These developments helped to ease mortgage rates lower this week.

Low mortgage rates are making homes more affordable. The National Association of Realtors' affordability index indicates that over the past three quarters, homes have been more affordable than any other time since the group began keeping the index in 1970, Nothaft said.

According to a separate survey released by Bankrate.com on Thursday, 30-year fixed-rate mortgages averaged 4.46% and 15-year fixed-rate mortgages averaged 3.61%. Seven-year ARMs averaged 3.45% this week, while the 10-year ARM averaged 3.93%, according to Bankrate.