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Gibson's Paradox: The Consequences For Gold
Submitted by Alasdair Macleod via GoldMoney.com,
We now have an explanation for Gibson's paradox (posted here), a puzzle that has defeated mainstream economists from Fisher to Keynes and Friedman.
The best way to illustrate the puzzle is through two charts, the first showing empirical evidence that interest rates correlate with the price level.
And the second, showing no correlation between interest rates and the annual change in the price level, i.e. the rate of inflation.
The solution to the puzzle is simple: in free markets, interest rates are set by the demands of investing businesses which at the margin will pay a rate of interest based on whether their product prices are rising or falling: hence the correlation.
The second chart shows that central bank policies, which seek to control prices by setting interest rates, have no theoretical justification behind them. They are the consequence of blindly accepting the quantity theory of money, upon which macroeconomics is based.
A mistake made by central bankers is to believe that the price of money is its interest rate, instead of the reciprocal of the price of the products for which it is exchanged. Interest rates are money's time preference, which in free markets broadly reflects the average time preference of all the individual goods bought with money. The problem with monetarism is that it ignores this temporal aspect of exchange.
It is worth bearing in mind that tomorrow's prices, and therefore the purchasing power of money, are wholly subjective, or put another way cannot be known in advance: if they were, we would be able to buy or sell something today in the certain knowledge of a profit tomorrow, which is obviously untrue. It therefore follows that the relative quantities of money and goods are not the key factors in determining price relationships. Far more important are consumer preferences for money against goods, which taken to an extreme can render the purchasing power of a currency to be worthless, irrespective of its quantity. This insight is necessary to put monetary theory into its proper context.
Through monetary policy the Bank of England has overridden free market relationships since the mid-1970s, the Gibson relationship being apparent in the 240 years up to then. Chart 3 continues where Chart 1 left off.
The relationship ended when the Bank of England raised interest rates to 17.1% in 1974 to stop the hyperinflation of prices. For the first time the BoE set interest rates higher than the rate would have been in free markets relative to price levels, and the Fed did the same thing five years later. Since then prices have continued to rise, albeit at a declining pace, and sterling has lost a further 88% of its purchasing power and the US dollar 76%. Since that time interest rate management by these central banks has continued to suppress the Gibson relationship, as we should now call it.
Monetary policy impairs the market between borrowers and savers. We see this today, with zero interest rates suppressing the relationship between savers and investing businesses creating an economic stasis. This brings us to a second error exposed by Gibson. The Fed is expected to raise interest rates from the zero bound in a few months' time in an attempt to return to some sort of normality.
A rising interest rate trend would, according to Gibson, encourage prices to rise towards and likely through the Fed's 2% target inflation rate. This is not how financial traders see it, nor does the Fed. They expect the exact opposite, believing that rising interest rates are bad for demand and commodity prices, which is why the decision has been deferred for so long.
The evidence tells us this view is mistaken and that rising interest rates will be accompanied by rising commodity prices. For example, between 1970 and 1980 gold rose from $36 to $800, and US interest rates from 9% to 17% as shown in Chart 4.
This is a slightly different point, but is graphically illustrates the mistake of thinking the price of anything can be suppressed through higher interest rates.
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Gold is real money. Apparently the Keynesians at the employ of the corrupt Fed are the only ones who conveniently don't know it. Unfortunately, it will take an economic disaster to get people to wake up to what the Fed is up to.
https://biblicisminstitute.wordpress.com/2014/08/24/the-corrupt-federal-...
If history is anything to go by; they will not wake up even then
The entire game will pivot on gold........sit back and eat your popcorn
Gold will be the last man left standing.
Could be when interest rates go up they indicate devaluing currencies, which might make tangible items "worth" more in terms of the currencies.
Right. Higher national debt load = higher prices. 10% interest rates would add 10% to the already growing national debt. This is modern debasement versus the old fashioned way.
https://en.wikipedia.org/wiki/Debasement
I wish Macleod added both nominal vs real rates of interest (ie the interest rate adjusted for inflation). That might be very telling. If the real rate of interest adjusted for inflation is negative - gold is a no brainer. But that said, this has little to do with what the China, India, Russia, Turkey and now Iran do with repect to their buying - both CB and Consumer - which continue to exceed mine supplies.
And doesn't that just suck. I guess there is something about human nature that we have to fix stuff that ain't broke, till it does break, which gives us an excuse to fix it some more.....
Since the published inflation rate is a government fraud I don't see Gibson's paradox theory based on solid info.
By looking at two lines on a chart one may notice that they move together but it does not prove one causes the other. I did not see a proof in this article that interest rates make inflation. I have always liked the theory that interest rates without the fed would tend to be inflation plus 3%. This rate gives the saver inflation plus a small reward. I don't think that theory can be proved either since interest rates have been well above and well below at various times.
I think one can say that ZIRP has made a mess of things and 1/4% is so small it will still make a mess.
One can say with confidence that bond prices move inverse to interest rates. One could say the same for stocks if PE and earnings could be held constant but they are not constant.
Well said 'Cat.
Debts used to be paid in gold. Now they are paid with more debt!
Further proof that "economics" is an abortion masquerading as an academic "discipline", an bizarre ritual conducted by high priests of counterfeiting and deficit spending.
Economics isn't the problem, economic theory is......
The only requirement to be an economist is to call yourself one.
Go ahead. You can be an economist too.
Even in 2004 till 2006 when Greenspan raised rates from 1 to 6, gold went up markedly
...and here's why;
https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm
Us debt doubled under GWB.
The less manipulated commodities may behave in the manner the author supposes.
Gold is not one of those.
Winner.
Desperate? A lady is a lady, when she stakes a claime-.
She shows promise
The Fed has desperately tried everything they could (QE) to get US inflation and interest rates up, to no avail: all they inflated was the stock market. So now they will simply damn the torpedoes and raise rates themselves. They know full well that by raising rates the inflation they have wanted for so long will follow; they would just rather have followed the market.
Well, they can blame it on the Tea Party. Since 2012, when TEA took Congress, the national debt has only increased from 16 to 18.25 Trillion, 14% / 3 = 4.67% per yr. That's just the national debt. This is why the relentless attacks against all things TEA, Taxed Enough Already. At this rate of growth, it will take 15.4 years to double the national deb(steal 1/2 of the dollar's value).
Whereas, they managed to double the national debt in only 6 yrs. before! 100% / 6 = 16.67% per yr.
Interesting. I have theory that the amount of naked shorting of a commodity could influence it's price. I know---crazy town, all aboard choo, choo.
Gibson's Paradox has a good ring to it. I think I'll name my theory Nutjahb's Predicament. No, that sound pretentious. Nutjahb's Theory of
Getting Fucked seems more down to earth.
The solution to the puzzle is simple: in free markets, interest rates are set by the demands of investing businesses which at the margin will pay a rate of interest based on whether their product prices are rising or falling: hence the correlation.
In a properly managed MOE, interest collections exactly equal defaults ... all the time, and everywhere. In a properly managed MOE the correlation between interest collections and defaults is perfect. There is no lag at all and the amplitudes match exactly.
The second chart shows that central bank policies, which seek to control prices by setting interest rates, have no theoretical justification behind them. They are the consequence of blindly accepting the quantity theory of money, upon which macroeconomics is based.
A properly managed MOE has no concern for prices at all. It guarantees zero inflation of the MOE itself, all the time and everywhere. Only traders set prices in the negotiation phase of their trades. It's called trade.
Money is obviously "a promise to complete a trade". What's to theorize?
You mean "currency" is a promise to complete a trade. Real money (i.e., gold and silver) is NOT a promise -- it's wealth. After all, a miner who digs up an ounce of gold hasn't promised to complete a trade with anyone, but he does have real wealth, free of counterparty risk of any kind. Whether he chooses to spend it or save it is up to him.
Real money (i.e., gold and silver) is NOT a promise -- it's wealth.
Fine (actually not fine ... you're being belligerent). Except for the first 20 years of my life, when US coins were 90% silver ... and "gold money" was never used, I have not traded with your confused definition of money. There were booms and busts before and after that, and the were caused by the purposeful mis-management of the MOE.
You can mis-managed a commodity backed MOE as easily as any other kind. In fact, the manipulators love commodity backed MOE because it gives them control of trade. And the commodity backing is a sham. No commodity has ever fully backed any MOE.
After all, a miner who digs up an ounce of gold hasn't promised to complete a trade with anyone, but he does have real wealth, free of counterparty risk of any kind.
Perhaps ... if he's panning for it. And he probably promised to complete a trade for his pick, shovel and pan before he ever started. It was called a "grub stake". Large mines do their business almost entirely using trading promises. Futures markets were created to facilitate this.
For example, between 1970 and 1980 gold rose from $36 to $800, and US interest rates from 9% to 17% as shown in Chart 4.
Obviously that rise in gold price wasn't caused by a supply/demand imbalance in gold. It was caused by an improperly managed MOE that wasn't guaranteeing and delivering zero inflation of the MOE itself.
A rise of interest rates like that with a properly managed MOE would suggest a rise in defaults. Of course we have no measure of defaults at all.
But the governing relation, which works whether the MOE is properly managed or not is:
INFLATION = DEFAULT - INTEREST (and these are not rates but absolute values of the MOE itself).
So in that improperly managed MOE there was high inflation and high interest collections, which would signal even higher defaults. This was the period of the Arab Oil Embargo where the cost of everything with an energy component (i.e. everything) was going up due to an artificial and abrupt change in oil pricing caused by the abrupt reduction in supply.
But with the ham handed MOE managers we've always had, they were certainly way late in reacting and likely acted incorrectly as well. So the accumulation of errors resulted in that ridiculous imbalance.
With a properly managed MOE with its automatic negative feedback stability, those price increases disrupted many traders in-process promises and resulted in defaults. These defaults had a cascading effect which capitalism always brings.
With a properly managed MOE these defaults would have been met immediately with an increase in interest collections to recover the defaults. There would be no cascading default effect. Higher interest collections on new trading promises would have a throttling effect on new trading promises while protecting existing in-process trades. The problem would have been nipped in the bud and the Arabs would have had to abandon their oil delivery strangulation. Demand would have gone down rather than prices going up.
Another epic and historic con job by the Chinese in motion. As they lull the world into thinking they aren't really interested, they quietly buy up all the physical gold that's out there, at relatively low prices. At some point in the future, they announce record holdings. Panic ensues. Paper contracts crushed. Associated delivery impossible. The dollar is toast, as is any chance of recovery by the Fed/banksters/sheeple. The Chinese probably can''t believe their luck in how they are dealing with a nation of morons at this historic point in time. Buy your popcorn now, this will be entertaining.
popcorn = gold
I got over 10 grams of 14k today, a rope necklace and a pendant...for 1 dollar. There it was, in the zip-lock baggie with a 1.00 sticker on it...
Keep this up, I don't care...No one pays any attention to gold anymore. I do, and I find it. Once the price goes up, my 'Golden Age' comes to an end...
gold is expensive
Show me the inventory Bitchez
Here is why gold prices are so low:
http://michaelekelley.com/2015/07/20/dear-fed-plz-raise-gold-price/
http://www.zerohedge.com/news/2015-07-09/are-big-banks-using-derivatives-suppress-bullion-prices/
Here are some more signs of a coming recession.
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Absolutely true. Interest is a cost that is passed on in the form of higher prices. Of course with everything being manipulated you can't always see it. Take wheat for example. How can farmers sell it for half their cost to grow it? Simple. Government price supports.
"A rising interest rate trend would, according to Gibson, encourage prices to rise towards and likely (??)......"
Nope !
A rising interest rate would make saving more attractive.
A higher rate would shift the preferences from buying to saving, making consumer poducts trend to cheaper and investment trend to dearer.
A lower rate would make investments trend cheaper and consumer products trend more expensive.
Saving (investing) or consuming.... the same amount of money keeps circulating in the market.
The price of money ( fiat or gold) will only rise if demand rises and/or supply decreases.
One could increase, influence, the demand and supply of money on the (free) market only by putting money in a vault, keeping it out of the market place. ( Or vica versa: selling it into the market; decreases the price).
An other problem is the valuation, the promise, of some monies. Will people buy paper+ink or choose gold .....or other rare stuff ?
What will the trend of the price of paper+ink or the trent of gold/metal be while the FED keeps on printing fiat money ?
Sorry Macleod and Gibson...
When exaimining a hypothesis choose a situation where data varies by orders of magnitude. Thw Weimar provides such a data set. The inflation rate measured in Reichmarks was astronomical but the real interest rate was, for most of the peroid, negative since the Reichsbank charged only 5% for loans. But in real money terms the amount of gold equivalent in circulation by the mark/dollar exchange rate converted to oz of gold was 300 million oz in Jan. 1919 and only 5 million oz in Oct. 1923. So in real terms profoundly negative interest rates correspond to profound deflation measured in a real medium of exchange in accord with Gibsons Paradox.
I have a question/point that I have not seen addressed. The US Goverment requires taxes be paid in FRNs. Regardless of all other factors, I must have sufficient FRNs to pay "the Knig" off or he will send thugs to do me physical harm. The real value if the dollar is it pacifies the US Government. I will always be willing to trade gold, or silver or whatever to get the FRNs the King demands. I value my teeth and have no desire to learn about alternative sexual positions.
Seriously, the people who assert that FRNs are "fiat" do not account for the fact that the King requires tax payment in that script. They are not if value via fiat. They are of value as a requirement to pay taxes here in the land if the free.
Thoughts?