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Best of the Blogs, Financials: A Lesson on Gold-to-Dollar Price Ratios


Plus, who's been behind health-care spending and why Draghi skipped Jackson Hole.

This column highlights the most interesting and useful business and financial commentary on financials from around the Web.

Link: China, Dollars, Gold, and a Theory of Relativity
"When there is a shortage of dollar 'rations' (or dollar stores of value) , there is a relative abundance of goods, services and assets. This creates a deflationary effect. When there is an abundance of dollar 'rations,' there is on the contrary a shortage of goods, services and assets, creating an inflationary impact instead. The same logic also applied to gold, when it represented the basis of the rationing system that the world used."

"If you suppress the growth of dollar rations at a time of general abundance, however - the relative advantage of holding gold begins to dwindle. More pertinently, the gold price starts to stabilise, and the two effectively begin to trade in tandem as an implicit gold standard is re-created. While expectations of more dollar rations can still destabilise the relationship in favour of gold, expectations of fewer dollar dollars in the system can have the opposite effect (leading to a preference for dollars) - especially if the greater practicality of holding dollars becomes a preference."

California Healthcare Foundation
Link: US Health Care Spending: Who Pays?
"In 1960, almost 100% of the spending on prescription drugs came out of the consumer's pocket; by 2010, out-of-pocket spending was down to 20%. Over the past 50 years, there have been major shifts in the way hospital care, physician services, long-term care, prescription drugs, and other services and products are paid for. This interactive graphic uses data from the Centers for Medicare and Medicaid Services to show national spending trends from 1960 to 2010 for health care by payer."

Liberty Street Economics
Link: Interest on Excess Reserves and Cash "Parked" at the Fed
"Since 2008, the amount of money banks hold on deposit at the Federal Reserve has increased dramatically, as shown in the chart below. The vast majority of these funds represent excess reserves, that is, funds held above the level needed to meet an institution's reserve requirement. (See this Federal Reserve Bank of Richmond paper for a more detailed view.) Some observers have called for the Fed to lower the interest rate it pays on excess reserves (often called the IOER rate) as a way of encouraging banks to maintain lower balances."

"What determines the size of the monetary base? As with any other institution's balance sheet, the Fed's dictates that its liabilities (plus capital) equal its assets. The Fed's assets are predominantly Treasury and mortgage-backed securities, most of which have been acquired as part of the large-scale asset purchase programs. In other words, the size of the monetary base is determined by the amount of assets held by the Fed, which is decided by the Federal Open Market Committee as part of its monetary policy."

Link: Operation Twist: Guessing Why Draghi Scotched Jackson Hole
"Draghi, the president of the European Central Bank, today said he's skipping the Kansas City Fed's annual Jackson Hole symposium, because of a 'heavy workload.' That is a tea-leaf reader's dream, and now, instead of mulling the will-he/won't-he of Ben Bernanke's keynote speech (Friday, 10 a.m. ET, incidentally), we can play a guessing game over the why'd-he of Draghi ditching Jackson Hole."

"The markets aren't reading too much into it right now. European stocks are down, but euro's higher, and Spain's 10-year bond yield isn't moving much, despite the news out of Spain."

Link: Deal Helps a Bank Catch Up in Capital
"Last week, M&T Bank (MTB) paid back the government its bailout money, and on Monday, it announced the acquisition of Hudson City Bancorp (HCBK), a struggling mortgage lender.

"The transactions appear to affirm M&T Bank's reputation as a hardy institution that has sought since the financial crisis to avoid hurting the interests of its shareholders."
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