2013 Media Placements - The Abbi Agency

Universal Value AdvisorsTable Of Contents

Date Publication Title

4/13/2013 KTVN News 2Face The State: Dr. Robert Barone Of

Universal Value Advisors

4/11/2013 KTVN News 2Battle Over Business Tax For Education Just

Beginning

4/7/2013 Reno Gazette JournalInflation Could Be Closer Than We Think Right

Now

3/27/2013 Bankrate Dow Hits A New Record, So What?

3/26/2013 Fox Business 42% Of Middle Incomes Hit By Payroll Cut

3/25/2013 Bankrate42 Percent Of Middle Income Hit By Payroll

Cut

3/24/2013 Reno Gazette JournalIs The Market's Record High Just Another

Bubble?

3/10/2013 Reno Gazette JournalWhere Burden Of Higher Minimum Wage

Falls

3/8/2013 Reno Gazette Journal - OnlineWhere Burden Of Higher Minimum Wage

Falls

3/7/2013 Reno Gazette Journal - Online Universal Value Advisors Is GIPS Verified

2/24/2013 Reno Gazette JournalAs Push Comes To Shove, Central Banks Will

Print

2/21/2013 ForbesWhen Push Comes To Shove, Central Banks

Print

2/14/2013 Bankrate Will Minimum Wage Boost Kill Stocks?

2/12/2013 The Street An Age Of Gold, Not A Golden Age

2/10/2013 Reno Gazette Journal Margins Tax' Potential Disaster For Nevada

1/27/2013 Reno Gazette JournalLiving In An Age Of Gold Rather Than A

Golden Age

1/13/2013 Reno Gazette Journal Headwinds Will Keep Interest Rates Low

1/2/2013 KOLO tvLocal Economic Impact After Fiscal Cliff

Averted

In 2014, a bill lawmakers decided not to take action on, will be on the ballot.

I'm talking about the proposal to impose a 2 percent margins tax on businesses making more than $1 million to help fund K-12 education.

I sat down with economist, Dr. Robert Barone for my weekend show 'Face the State.'

He said if voters approve a margins tax on businesses, it will have unintended consequences that he believes could prevent Nevada from recruiting more businesses.

He said it won't just hurt businesses, but workers as well.

"They're not going to get raises, there's not going to be job opportunities, there won't be growth, businesses will close and leave," said Dr. Barone. "This is the reality of what this tax does."

He also said he's not necessarily against taxes. He said the best tax would be a sales tax or consumption tax because then only the consumers will pay more, not businesses that are trying to grow in a fragile economy.

He said taxing businesses will cause many prospective businesses considering moving to Nevada not to.

However, there is another side that says these businesses are getting pretty much whatever they want to do business here in Nevada without having to pay a lot of taxes - or really any. And, we are in a hole education-wise and are facing budget cuts.

Dr. Barone said the point is another tax will only hurt businesses.

"Look at Amazon. How many hundreds of millions of dollars does Amazon sell out of its fulfillment center in Northern Nevada? I don't know how much it is but hundreds of millions, but they operate on small margins and high volumes. That would destroy their business."

Those in favor of a margins tax say it would generate $800 million for education each year.

You can watch the entire interview with Dr. Barone this weekend on Channel 2. It airs Saturday at 4:30am and 4pm. It also airs Sunday at 6:30am.

3/27/2013

Financial Security Index Charts 42% Of Middle Income Hit By Payroll Cut

Despite fears that the payroll tax cut expiration would slow down the mighty consumer, most working Americans say they didn't notice an extra 2% coming out of their paychecks at the beginning of January, according to Bankrate's March 2013 Financial Security Index.

Though 55% of Americans were unaware of, or unaffected by, the 2% hit to their paycheck, the survey found 30% say they did cut back on their spending as a result of the tax cut expiring.

Additionally, 8% of Americans said they put less money into savings as a result of the payroll tax while 3% said they scaled back their retirement contributions.

The 2% payroll tax cut originally began in 2011 as a result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. It reduced Social Security tax withholding from 6.2% to 4.2% of wages paid, the Internal Revenue Service reports. Now that the economy is back on track, everyone can pony up the extra 2%, or so the thinking seems to be.

Who Cut Back?

Ahead of the expiration date Jan. 1, retailers catering to low- and middle-income households, such as Wal-Mart, expressed concerns as to whether their customers would be able to spend with the same abandon going into 2013. Consumer spending looked a bit grim after November's election, so the fear of even less spending by households was not entirely unfounded. The good news for the economy is that consumers have answered those concerns by pulling out their wallets -- even the lowest-earning households.

In fact, lower-income earners in Bankrate's survey were most likely to say that they did not notice the change in the payroll tax, at 59% for households with an income less than $30,000.

Middle-income households, those with incomes between $50,000 and $75,000 were most likely to say that they cut back on spending. Only 39% of this income section identified as not noticing the change.

"Low-income earners typically have to live on a tight budget," says Xavier Epps, financial adviser and CEO of XNE Financial Advising in Woodbridge, Va. If their income drops slightly, it might not be "as noticeable compared to someone with a higher income that sees a bigger change in the net paycheck," he says.

Average amount no longer in biweekly paycheck due to payroll tax cut expiring

Annual salary $25,000 $50,000 $75,000

2% more tax per year $500/year $1,000/year $1,500/year

Average cut per paycheck Nearly $20/paycheck Nearly $40/paycheck Nearly $60/paycheck

More than a quarter of workers labor in low-paying jobs, according to a 2012 study by the National Employment Law Project. The study found that more than 1 in 4 workers earned less than $10 per hour in 2011. Many of those jobs are in the food service industry or retail services where hours worked -- and pay -- could fluctuate weekly. The varying paychecks could make noticing a change from week to week more difficult as well.

One reason few have curtailed spending as a result of the tax cut could be from a sense of euphoria creeping back into the economy, says Howard Dvorkin, CPA and founder of Consolidated Credit Counseling Services Inc. Those feelings of well-being are due in part to the recent stock market highs and continued job growth the nation is experiencing.

Spending Data and Retail Sales

With 30% of Americans reporting that they have curtailed spending, the overall economic impact could be significant -- after all, consumer spending makes up nearly 75% of the gross domestic product, or GDP.

If nearly a third of Americans have cut back spending by 2%, GDP could go down by as much as 0.6%, says Robert Barone, chief economist and portfolio manager at Universal Value Advisors in Reno, Nev.

Time will tell how the payroll tax expiration will shake out in regard to spending. While consumer spending tumbled last fall, it has since made positive, if slight, gains through December and January. January's consumer spending increased 0.2%, according to the personal income and outlays report from the Commerce Department.

Retail sales in February clearly show a more positive spending trend. Retail and food service sales were up 1.1% from February, which is 4.6% higher than last year, the Commerce Department reported this month. If more economic indicators come in as positively, 2013 may shape up to be a turning point.

"There is a good chance that we look back on 2013 as the year the economy finally gained its footing and provided the spark we really needed. The tax increase will be a headwind, but hopefully it will be small enough to not derail what could be very good growth," says John Stewart, managing director and founder of Vantage Economics in Washington, D.C.

Could the economic recovery really be taking hold? With the stock market up and home values increasing along with paychecks and employment, it certainly appears that consumers may be close to believing it.

3/25/2013

Despite fears that the payroll tax cut expiration would slow down the mighty consumer, most working Americans say they didn't notice an extra 2 percent coming out of their paychecks at the beginning of January, according to Bankrate's March 2013 Financial Security Index.

Though 55 percent of Americans were unaware of, or unaffected by, the 2 percent hit to their paycheck, the survey found 30 percent say they did cut back on their spending as a result of the tax cut expiring.

Additionally, 8 percent of Americans said they put less money into savings as a result of the payroll tax while 3 percent said they scaled back their retirement contributions.

The 2 percent payroll tax cut originally began in 2011 as a result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. It reduced Social Security tax withholding from 6.2 percent to 4.2 percent of wages paid, the Internal Revenue Service reports. Now that the economy is back on track, everyone can pony up the extra 2 percent, or so the thinking seems to be.

Who cut back?

Ahead of the expiration date Jan. 1, retailers catering to low- and middle-income households, such as Wal-Mart, expressed concerns as to whether their customers would be able to spend with the same abandon going into 2013. Consumer spending looked a bit grim after November's election, so the fear of even less spending by households was not entirely unfounded. The good news for the economy is that consumers have answered those concerns by pulling out their wallets -- even the lowest-earning households.

In fact, lower-income earners in Bankrate's survey were most likely to say that they did not notice the change in the payroll tax, at 59 percent for households with an income less than $30,000.

Middle-income households, those with incomes between $50,000 and $75,000 were most likely to say that they cut back on spending. Only 39 percent of this income section identified as not noticing the change.

"Low-income earners typically have to live on a tight budget," says Xavier Epps, financial adviser and CEO of XNE Financial Advising in Woodbridge, Va. If their income drops slightly, it might not be "as noticeable compared to someone with a higher income that sees a bigger change in the net paycheck," he says.

Average amount no longer in biweekly paycheck due to payroll tax cut expiring

Annual salary $25,000 $50,000 $75,000

2% more tax per year $500/year $1,000/year $1,500/year

Average cut per paycheck Nearly $20/paycheck Nearly $40/paycheck Nearly $60/paycheck

More than a quarter of workers labor in low-paying jobs, according to a 2012 study by the National Employment Law Project. The study found that more than 1 in 4 workers earned less than $10 per hour in 2011. Many of those jobs are in the food service industry or retail services where hours worked -- and

3/25/2013 pay -- could fluctuate weekly. The varying paychecks could make noticing a change from week to week more difficult as well.

One reason few have curtailed spending as a result of the tax cut could be from a sense of euphoria creeping back into the economy, says Howard Dvorkin, CPA and founder of Consolidated Credit Counseling Services Inc. Those feelings of well-being are due in part to the recent stock market highs and continued job growth the nation is experiencing.

Spending data and retail sales

With 30 percent of Americans reporting that they have curtailed spending, the overall economic impact could be significant -- after all, consumer spending makes up nearly 75 percent of the gross domestic product, or GDP.

If nearly a third of Americans have cut back spending by 2 percent, GDP could go down by as much as 0.6 percent, says Robert Barone, chief economist and portfolio manager at Universal Value Advisors in Reno, Nev.

Time will tell how the payroll tax expiration will shake out in regard to spending. While consumer spending tumbled last fall, it has since made positive, if slight, gains through December and January. January's consumer spending increased 0.2 percent, according to the personal income and outlays report from the Commerce Department.

Retail sales in February clearly show a more positive spending trend. Retail and food service sales were up 1.1 percent from February, which is 4.6 percent higher than last year, the Commerce Department reported this month. If more economic indicators come in as positively, 2013 may shape up to be a turning point.

"There is a good chance that we look back on 2013 as the year the economy finally gained its footing and provided the spark we really needed. The tax increase will be a headwind, but hopefully it will be small enough to not derail what could be very good growth," says John Stewart, managing director and founder of Vantage Economics in Washington, D.C.

Could the economic recovery really be taking hold? With the stock market up and home values increasing along with paychecks and employment, it certainly appears that consumers may be close to believing it.

In an era in which unemployment is the biggest problem facing the economy, raising the minimum wage likely is to exacerbate the issue.

Economics 101, taught at every college and university in the free world, instructs us that free markets clear where demand and supply intersect. However, if artificial constraints are imposed and raise the price of the good or service, the demand for the good or service (in this case, labor) falls.

Consequences of fixing prices

Labor, capital and raw materials are inputs in the productive process. To an employer, especially a business that employs low-skilled labor, raising the minimum wage is like adding a tax to an input, just as if the raw materials were taxed.

What if the government passed a law that said the minimum price of a gallon of gasoline is $5.75, i.e., $1.75 higher than the existing $4 a gallon?

There certainly would be people who would not be impacted (the 1 percent), but for most, the higher price significantly would impact discretionary spending and economic growth would be negatively affected, as most consumers would cut back on auto travel.

Just as the tax on gasoline would impact the demand for it, so, too, raising the minimum wage significantly would impact those businesses that rely on low-skilled labor.

How about $100 an hour?

If it is really beneficial to raise the minimum wage from $7.25 to $9 an hour, why stop there? Why not raise it to $100 an hour?

“Absurd,” you say. Of course, such an idea is absurd. Much of the employed population would be laid off as employers couldn’t afford to keep employees whose hourly production doesn’t yield a margin before wages and benefits of $100. So, why is this different from $9 an hour? For one, most folks already earn more than $9 an hour. So, massive layoffs won’t occur.

But, there are some employers who either will lay off the low-wage worker or simply will not hire if those workers produce less than the required $9 an hour margin needed by the business. While the impact of the $9 an hour minimum wage won’t be as obvious as the leap to a minimum of $100 an hour, there still is an impact.

Negative consequences of past minimum wage jumps

Those who get a $1.75 an hour raise, from the current $7.25 to $9 an hour, clearly benefit. But, the least educated and least skilled likely are victims. Who are these? Generally, teens.

According to a Feb. 15 Wall Street Journal editorial titled “The Minority Youth Unemployment Act,” 85 percent of the academic studies find negative consequences on low-skilled workers — usually teenagers — from mandated minimum wage increases. The studies include a recent one by William Dunkelberg, chief economist for the National Federation of Independent Businesses.

Dunkelberg found that 600,000 teen jobs disappeared in the six months following the July 2009 minimum wage increase (to $7.25 an hour), a period in which the gross domestic product was rising. In the previous six months, when the GDP rapidly was contracting, Dunkelberg said that only half that many teen jobs disappeared.

Redistribution within low-skilled ranks

It is clear that those keeping their minimum wage jobs benefit from the higher wage rate, but it also means that those who would have gotten jobs at the lower wage rate remain unemployed.

This, in effect, is a redistribution of income within the segment of the labor force having the lowest level of skills and education, and it puts the burden of the higher wages earned by those keeping minimum wage jobs directly on those who cannot now find employment at the higher minimum wage.

In economic jargon: Those making the incremental difference in the minimum wage are being subsidized by those who cannot find employment at these higher-wage levels but would be able to do so at the lower-wage level.

This is similar to a union that refuses to accept lower wages and benefits in hard economic times, forcing layoffs of union employees. The burden is felt entirely by those who are laid off instead of it being spread among all.

Manipulation of populist sentiment

Those, of course, who do benefit think this is a good idea. Those who can’t find jobs simply aren’t aware that it is the rise in the minimum wage rate that is the issue, as there generally is no direct and recognized measurement of this phenomenon. As a result, populist sentiment could very well think this is a good idea.

But, from the standpoint of trying to reduce the unemployment rate, especially for teens, this is a bad idea. For the past 150 years, students have learned this in Economics 101. But, for at least the last half of that 150-year period, sound economic theory has been ignored by policymakers and legislators.

Implications for investors

In the end, raising the cost of labor, albeit at the low end, will, like all taxes, fees, rules and regulations on businesses, especially small businesses and those relying on low-skilled labor, reduce output and constrain economic growth at a time the economy can ill afford it.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and currently is a director for the AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone is available to discuss client investment needs. Call him at 775-284-7778.

With worldwide demand for oil ebbing [.5% growth in '11 and .3% since '08 (compound annual growth rate – CAGR)], and with huge new discoveries, it would be logical that the price of related commodities would be falling. The price of gasoline, for example, is currently 2.3 times its $1.61/gallon low of four years ago. The price of gold, while down from its peak, is still much higher than its $1,100/oz price at that time. The question: Why have the prices of these hard assets risen so rapidly despite high unemployment, weak demand, and excess capacity in the economy? To answer this question, one must understand the underlying structural issues facing the U.S. and the developed world, and the responses to these issues from governments and central banks.

Structural Budget Issues

The National Debt of the U.S. currently stands at $16.5 trillion, and unless current economic growth improves dramatically, and soon, the actual National Debt is likely to be closer to $22 trillion by 2017.

The table shows estimates of spending for the six largest federal expense categories using USDebtclock.org 2013 estimates and CBO estimates for 2017. The issue is that these six categories eat up 100% of total tax collections even under CBO’s optimistic set of assumptions. On top of these six categories is the cost of the other functions of government including all of the internal departments (DOJ, Homeland Security, EPA, Commerce, Interior, State, etc.) and the off budget expenses of the agencies (FNMA, FHA, GNMA, FHLMC, Post-Office, Amtrak, etc.).

The Debt Cost Issue

In Japan, the Debt/GDP ratio is more than 200%, and the interest cost of the debt is 20% of tax collections. The coupon cost of the debt is about 1%. If rates rose to 3%, 4%, or 5%, the cost of their debt would rise to 60%, 80%, or 100% of their tax collections. Clearly, they could not allow this to happen, and either default or massive inflation would occur. Interestingly, Japan has embarked on a massive money printing scheme and has compromised the independence of its central bank in the process.

Using the maturity structure of the existing U.S. Treasury marketable debt, the table below shows estimates of what would happen to the cost of the debt in five years under different rising interest rate scenarios. A return to a “normal” interest rate structure may truly be a budget busting event.

The Real Budget Deficit Issue

On January 17, the U.S. Treasury announced that the deficit for the 2012 fiscal year, using Generally Accepted Accounting Principles (GAAP) was $6.6 trillion, of which $5.3 trillion was the net present value of the future promises that were made in 2012 alone. This isn’t really a surprise, as the GAAP deficits have been in excess of $5 trillion since the Recession. Unfortunately, the number is simply ignored by the media and the markets. Due to demographics, such annual promises will only increase under the current social programs in the U.S. for the next ten years. The structural deficit is most likely the most critical economic issue of our time.

Scary Scenario

We all hope that the economy picks up, the unemployment rate falls, and that economic growth returns to a more normal pace. But, if that doesn’t soon happen, investors, both foreign and domestic, may begin to lose faith in the dollar as the world’s reserve currency, and, despite an under performing economy, demand higher interest returns. This type of scenario is what played out in Europe in 2011-2012 when rates rose on the debt of Greece, Portugal, Spain and Italy. Note that the European Central Bank rode to the rescue of the European Union periphery by printing tons of money and by purchasing the debt of the above named countries.

Here is the dilemma: If interest rates rise back to normal levels, the cost of the debt becomes a huge issue, especially if the economy is under performing. In the U.S., add to that the inability to control the debt issuance due to the structural problem outlined above. Those issues keep the Deficit/GDP ratio high and start a death spiral of ever rising rates which chokes the economy. And, as we saw in Europe last fall, the only relief that will satisfy the capital markets (i.e., the “bond vigilantes“) is a massive money creation.

For politicians, inflation via money printing is the easiest choice even if it means a subjugation of the independence of the central bank to the government’s will, as we are witnessing in Japan. Gold and other hard assets have, over the last few years, also been influenced. The precedents have clearly been set both in Europe and Japan. When faced with the choice of higher rates or money printing in an under performing economy, it is clear what the choice will be.

In Tuesday night's State of the Union address, President Barack Obama proposed an increase to the minimum wage by 2015, up to $9 from today's $7.25. There would also be a cost of living increase every year in the future.

States actually have their own minimum wage laws. "Minimum wage increases at the federal level only take effect if the federal minimum is above that passed in states," the Washington Post reported Wednesday, in the story "Four things to know about Obama's minimum wage increase."

Nonetheless, the increase would be higher than nearly all of the state minimum wage requirements, except for Washington where it's $9.19, according to the Department of Labor.

What about investors?

On Wednesday following the president's speech, shares of McDonald's Corp. fell 1.2 percent, Bloomberg reported. As McDonald's is one of the largest minimum wage employers in the country in addition to being one of the largest companies in the country, it's a hot spot in discussions over the minimum wage.

The last minimum wage increase was passed in 2007 when it increased from $5.15 to $7.25 over two years. Previously, the minimum wage was increased in 1996 and 1997, according to the Department of Labor.

If you take the potential minimum wage increase alone, it's impact is likely to be a blip, if that, for long-term investors. These two charts look at McDonald's share price in years when minimum wage laws went into effect. One thing that should be noted is that the stock market typically reflects new information right away. By the time a long-expected event occurs, it's already baked in to the share price.

In 1997, the minimum wage increase went into effect September 1.

In 2007, the increase kicked in July 24.

"The minimum wage increase is a problem for the stock market and companies who pay employees minimum wage in the short-term," says Robert Laura, president of Synergos Financial Group in Brighton, Mich.

"From an economic perspective, I see it as another headwind that will send the market backward. We haven't seen the impact the increased payroll tax is having just yet, gas prices are climbing, unemployment is still rampant, and corporate earnings are soft," he says.

Another concern is that an increase in the minimum wage could have a negative effect on unemployment, says Robert Barone, partner and economist at Universal Value Advisors in Reno, Nev.

"The impact of a higher minimum wage won't be obvious, and there is likely no way to directly measure it. We can think of it this way, however: Because the minimum wage has risen, industries relying on such labor are likely not to hire as many as would be the case if the minimum wage didn't rise, or they may even reduce their work forces," he says.

Some research does suggest that minimum wage increases does not have negative implications for jobs. In 1998, Jared Bernstein and John Schmitt wrote a paper for the Economic Policy Institute "Making work pay: The impact of the 1996-1997 minimum wage increase."

Among the findings:

The two-stage increase disproportionately benefited low-income working households. Although households in the bottom 20 percent of the income distribution (whose average income is $15,728) receive only 5 percent of total family income, they received 35 percent of the benefits from the minimum wage increase.

Four different tests of the two increases' employment impact -- applied to a large number of demographic groups whose wages are sensitive to the minimum wage -- fail to find any systematic, significant job loss associated with the 1996-97 increases. Not only are the estimated employment effects generally economically small and statistically insignificant, they are also almost as likely to be positive as negative.

This is a complicated issue. What do you think? Is the minimum wage unnecessary government meddling -- or is it necessary to ensure a decent standard of living?

Follow me on Twitter: @SheynaSteiner.

NEW YORK (TheStreet) -- On Jan. 17, a month late and to little fanfare and even less media coverage, the

U.S. Treasury Department reported the deficit was $6.9 trillion, or 46% of total U.S. economic activity for

2012, using Generally Accepted Accounting Principles. By comparison, the 2011 GAAP deficit was $4.6

trillion.

GAAP accounting is required of all publicly traded companies in the U.S. The GAAP deficit includes the

present value of all of the newly promised unfunded liabilities (mainly Medicare, Medicaid, and Social

Security).

The Government Accountability Office currently estimates the total sum of all past and present

unfunded liabilities at $88 trillion, or nearly six times the size of the GDP. The new unfunded liabilities

themselves were estimated by the GAO to be $5.3 trillion, or more than 35% of 2012's total economic

activity, and the deficit, excluding these newly promised unfunded liabilities, was $1.3 trillion, more than

$226 billion higher than the $1.1 trillion -- the "official" deficit estimate that is bandied about by the

politicians and the media.

State and local pensions are often criticized for being underfunded. However, if such a pension is

35% underfunded, at least 65% of the assets needed to make the future payments are present. By

contrast the federal government's promises are 0% funded and the payments must come out of

the taxes collected in the year the payments are due.

Worse, because of materiality issues, the GAO will not offer an opinion on the Treasury's GAAP

financial statements. Imagine what would happen in the marketplace to the stock price of a

publicly traded company that reports a loss, but upon audit it is revealed the loss is more than six

times higher and the auditor won't opine because of material issues with the data.

Think of the fury of the politicians and the reaction of the Securities and Exchange Commission.

Yet, not a word has been uttered, nor is the real magnitude of the U.S.'s fiscal issues even

acknowledged.

Gold, the Safe Haven

A Jan. 11 report authored by Meghnad Desai, chairman of the Official Monetary and Financial

Institutions Forum, a global monetary think-tank and adviser to central banks, sovereign funds

and financial policy makers, warns of "twin shocks" to the dollar and the euro while indicating

gold is a safe haven. The report contends that "gold -- the official asset that plays no formal part

in the monetary system, yet has never really gone away -- is poised, once again, to play a critical

role."

While the western currencies weaken due to heretofore unthinkable worldwide money-creation

policies, China and countries in Asia that have "over saved" now sit on "massive monetary

reserves." The level of such reserves has "become the most potent factor behind reserve

diversification into other assets including gold," says Desai.

That is, the holders of these reserves are beginning to shun the dollar and the euro and are

looking for safe havens. Sooner or later, China's renminbi will play a major international role.

But as of today the Chinese financial system is very immature, riddled with huge asset problems,

and is not capable of taking on more than a minor role in international trade.

As a result, as the world loses confidence in the dollar, euro, yen and sterling, safe havens will be

sought as a hedge against currency devaluations. No doubt gold will be a major player.

We Want Our Gold Now

In mid-2011, Hugo Chavez's Venezuela demanded that 160 tons of its gold bullion kept by the

Bank of England, JPMorgan Chase (JPM_), Barclays (BCS_) and Standard Chartered

(SCBFF) be shipped back to Caracas. It took several months to deliver, with the last shipment

arriving on Jan. 31, 2012.

Because delivery took so long there was some speculation the gold was not really in the vaults,

and that it had been loaned out or was being used as collateral during the euro crisis. It had to be

purchased on the open market and that is why it took so long to ship.

Not much was made of this at the time considering the source of the demand and the relatively

small amount involved.

Soon after, however, the central bank of Germany's governing body demanded an audit of the

gold reserves it had stored at the Federal Reserve Bank of New York. The N.Y. Fed had,

historically, been uncooperative with any inspection requests regarding the gold bullion it

supposedly held deep in its vaults in Manhattan.

Once again, in 2012, the N.Y. Fed denied the German request for an audit but after much political

pressure, succumbed somewhat and allowed a German official to inspect one vault - but still no audit of

the 1,536 tons of German gold that is supposed to be there. While all the Germans originally wanted

was a basic audit, the lack of cooperation on the part of the N.Y. Fed has now caused the Bundesbank to

demand that half of its reserves (768 tons) be transported back to Frankfurt.

Who could blame them? In an era in which we have seen the collateral of unsuspecting clients

simply disappear (M.F.Global, Bernie Madoff), and in an era where gold is pledged to cover

loans to large institutions and such loans are handed out willy-nilly, there should be cause for

concern on the part of large central banks that hold gold in foreign vaults.

Too Much Debt, Paper Money

The signs are clear. The world's major reserve currency country, the U.S., is running a GAAP

deficit six times larger than the "official" numbers, and that deficit represents nearly half of its

economic output. That reserve currency country is making payment promises it can't ever hope

to fulfill without either default or significant inflation.

The monetary authority, the Federal Reserve, enables such policies by running the money-

printing presses and using the newly minted stuff to purchase much of the deficit. Because there

are no real assets behind the unfunded liabilities, the cash deficit is destined to become larger and

larger as the promises made turn into demands for payments.

Unfortunately, the U.S. is not the only bad actor on this stage. The central banks of the other

industrial countries (Japan, Europe, the U.K.) have followed the Fed's lead.

International observers are warning of the implications of such policies, yet their warnings are

ignored and the policies persist. Because there is no other country with a sound financial system

that is capable of stepping up to reserve currency status, countries with significant monetary

reserves are starting to look to hedge the value of those reserves against what is sure to be

devaluing major currencies.

Japan has now, under the Abe government, openly espoused such devaluation. The policies of

the other major central banks appear to be leading to currency wars and a "race to the bottom" as

far as currency values are concerned.

Without a strong world reserve currency, the world's oldest traditional hedge, gold, is sure to

play a major role. Central banks around the world with currency reserves are scrambling to

hedge their hard-earned reserve stash. The actions of Venezuela and now the Bundesbank are

just the beginning. The warning signs are as clear as the words you are reading.

This article was written by an independent contributor, separate from TheStreet's regular news

coverage.

1/2/2013

Local Economic Impact After Fiscal Cliff Averted