Utah to accept gold & silver bullion as currency, move highlights broader financial realities in US


Utah is now accepting gold and silver as legal tender for transactions and to settle debts according to a bill recently signed into law by Governor Gary R. Herbert. Several other states have proposed similar measures in the wake of the monetary policies of the Federal Reserve and the decreasing value of paper money.

Utah’s law is notable because it is the first such bill to pass. Over 150 years ago Congress passed the Legal Tender Act which authorized the use of paper notes to pay bills and while paper money still retains the value noted, interest rates governing bonds and other savings or investment vehicles are at historic lows and are expected to remain at those lows through at least 2014.

Gold and silver bullion however, are at historically high values and observers expect those values to remain high for some time. The bill, HB 157 will allow for gold and silver bullion to be used for transactions based on the weight of the amount of metal presented. That is a key distinction because it expands out the use of gold and silver beyond face value on limited runs of precious metal coins offered through the US Treasury.

In practice, in Utah, individuals will be able to use gold and silver bullion in the same way as they would cash for transactions but also for currency exchanges. Individuals with the metal will be able to get fair market value in a trade for cash, or may start depositing or paying with it. The state will also be offering a one-time tax credit to offset any capital gains taxes accrued for individuals who choose to trade metal for paper.

The tax credit essentially ensures that the exchange works like any other currency exchange, say if someone went to Europe and needed to get Euros around that trip. It will also eliminate a shadow market for the metal as those with metal to exchange would normally call around for transaction prices in order to offset fees and taxes.

South Carolina has advanced a similar bill, the legislation is sponsored by Lexington Rep. Rick Quinn and it has passed the House Judiciary Committee and will be sent to the floor. The terms of the South Carolina bill allow gold and silver to be used as long as businesses agree to take them.

Some observers have said that the bills are an over reaction. However, there may be a currency devaluation argument to be made especially if monetary policy continues down the path of measures such as quantitative easing and operation twist. Currently, the money supply in the US has ballooned over trillion dollars in the last ten years. Money supply is defined as currency plus demand deposits.

Low currency value hits municipalities through bonds

Current forecasts from the Federal Reserve show that the money supply is expected to continue growing at a rate of 17.4% over the next 12 months. This rate may increase even more if the US continues to aid the struggling Eurozone. Essentially, what this all means is that with each new dollar printed in that 17.4% the value is less than the one that was printed before. Ten years ago, when the overall supply was just above 1 trillion, those dollars were worth more then than they are now with another trillion+ in the system. Add another 17.4% over the next year, and the value keeps going down backed by almost no interest revenue.

The overall impact for individual savers and states is clear. Individual savers will be eeking out tiny interest revenues on whatever they can save in a high unemployment, high-cost environment. States trying to finance projects and public services through bonds and other vehicles are finding that the offerings are less enticing to investors looking for a rate of return. All of this while overall demand on state infrastructure and government services continues to climb.

Seeking Alpha reports today that further pressure is coming from the feds who are looking at ways to reduce the tax exemption for municipal bonds. The President is proposing capping the tax benefit for muni bonds at 28% and some in Congress have proposed denying the tax exemption on new muni bonds altogether.

If this goes through, existing bonds will fall in value adding more pressure to already tight municipal budgets. Falling muni bond prices can cut projects in the pipeline, raise user fees or local taxes. As the piece notes, this may lead to more federal Build America style bonds, to help municipalities bridge the gaps although that also allows for increased federal scrutiny into projects.

Infrastructure falls further behind

As we have seen with the health care fight, rail and broadband financing, increased federal scrutiny tends to equate with states rejecting the funds. At a macro level this means that US citizens are paying more to receive less, both in terms of the level of service provided by their local governments but also in the overall quality of their local infrastructure. Individuals are typically the most common holders of municipal bonds either through direct purchase or investment funds.

Compared to other countries, the US invests almost nothing in its infrastructure. China spends 9% of GDP, Europe 5% and the US? Just 1.7%. As CivSource has reported before, our failing infrastructure impacts citizen’s ability to find and get jobs and job training, which hurt net competitiveness. Beyond the bottom line, symbolically it hardly says world superpower to run a country on 20+ year old trains, bridges and planes.

Transportation Secretary Ray LaHood has noted a variety of safety concerns that arise when roads and bridges are allowed to remain in use despite being below safety code. To speak nothing of the jobs that could be created through a public works program that would make them safe.

Through this lens, the debate over a long-term federal transportation plan sounds increasingly more absurd. Republicans in the House passed another extension/shell transportation bill yesterday. The bill provides an extension of the federal government’s authority to provide funds through the Highway Trust Fund until September 30. The bill is an extension of another extension passed earlier this year which granted the authority until June 30.

The current extension is a shell bill designed to force a conference so that both parties can hash out the specifics of a long-term transportation plan. The Republican plan is opposed by the Democrats and any compromises arising from the Senate conference are likely to be opposed when it returns to the House for final passage, since a conference bill is unlikely to include a provision for the Keystone XL pipeline. Republicans appear to be more focused on drilling for oil than creating jobs or improving safety.

No long-term plan is expected to pass during an election year as Republicans view that as handing a victory to their election opponent President Obama.

Enter Build America? Maybe. Some such as Jonathan Tisch, Chairman & CEO of Loews Hotels and Loews Corp are calling for private capital to step in and fund these projects through growth in public-private-partnerships and more cost-effective procurement.

The American Jobs Act of 2011 included $140 billion for infrastructure investments and included a provision to establish and infrastructure bank – an idea that has been making the rounds on capital hill for years. But as Bloomberg reported, an infrastructure bank doesn’t solve the reality of financing these projects. A safe bridge doesn’t come with increased value, it just won’t fall down as easily. This is why the private sector isn’t running out to build bridges and why infrastructure financing is hard.

The broader question seems to be how much longer can we afford to print money only to pass it around among assorted failing or terminally weak banks while refusing to spend any of it on our citizens.

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