April 16, 2013
Gold Prices Falling
Was their rise caused by “bad policies”? And why are they falling now?
From the NYT:
The assumption among gold bugs was that the flood of new money would cause inflation, making hard assets like gold more attractive. So far, though, there have been few signs of inflation taking root even as central banks in Japan and Europe have begun their own aggressive bond-buying programs.
Well, it is remarkable how rapidly gold prices shot up during a period of irresponsible fiscal policies, with big tax cuts and rampant government spending, denoted by the gray shaded area.
Figure 1: Price of gold bullion in dollars per troy ounce, London market, 10:30am, monthly average. Source: St. Louis Fed FRED.
Well, actually, the graph depicts the price of gold over the 1970M01-2008M12 period. That is, the sample predates the implementation of quantitative easing in the US, the UK and the euro area. The gray shading applies to the 2001M01-2008M12 period. Figure 2 depicts the log price of gold, over the 1970M01-2013M03 sample.
Figure 2: Log price of gold bullion in dollars per troy ounce, London market, 10:30am, monthly average, 1970M01-2013M03. Linear trend estimated over 2001M01-2011M08. Gray shading applies to 2001M01-2008M12. Source: St. Louis Fed FRED, and author’s calculations.
Notice that the slope of the price line is pretty straight over the 2001M01-2011M08 period. Since this is the logged price, this means that trend growth rate is pretty constant, at roughly 17.2%.
Another perspective can be seen by reference to the year-on-year growth rate of gold prices.
Figure 3: 12 month growth rate of the price of gold bullion, in dollars per troy ounce, London market, 10:30am, monthly average, 1970M01-2013M03. Linear trend rate estimated over 2001M01-2011M08 (red line). Dashed lines at QE1, QE2, QE3 start dates. Source: St. Louis Fed FRED, and author’s calculations.
Figure 3 highlights the lack of correlation of various bouts of quantitative easing and acceleration in gold price inflation. This is not surprising to informed observers of recent unconventional monetary policy measures, who are aware that increases in money base have not translated to corresponding increases in money supply (c.f., ). On the other hand, some movements are probably ascribable to movements in the policy rate, as Jim describes.
So why the recent drop in prices? One possibility is that expected inflation has declined from previous highs (despite the fact that expected inflation from surveys and from market based indicators have barely budged ). Don’t forget predictions of this nature (this one entitled subtly Hyperinflation and Gold: Losing Faith in the Dollar):
... most dangerously, through the mechanism of quantitative easing — buying government debt (Treasury bonds) in order to keep interest rates low and expand liquidity — the Fed inflates Treasury bond prices. If this Treasury debt bubble bursts, the result will be a further rush to commodities in a hyperinflationary attempt to dump dollars.
And you might then see people pushing wheelbarrows of dollar bills through the streets. ...
Another (related) possibility is the expected value of the utility of gold in the post-apocalypse world has declined (because the probability ascribed to the collapse of civilization has declined). From the NYT again:
“Gold has had all the reason in the world to be moving higher — but it hasn’t been able to do it,” said Matt Zeman, a metals trader at Kingsview Financial. “The situation has not deteriorated the way that a lot of people thought it could.”
I guess in both of these interpretations, I’m assuming non-rational behavior.
Or it could be a conspiracy.
Real side interpretations focus on the fact that demand for gold has declined as there has been a downward revision in expected income growth in China, a country that has been a support to gold demand in the past.
Figure 4: London gold price, daily, 10:30am. Source: St. Louis Fed FRED.
Finally, the price decline could be the collapse of a rational stochastic bubble (something hard to verify).
Posted by Menzie Chinn at April 16, 2013 08:04 AMdigg this | reddit
Can't wait for the fireworks on this one.
I wonder what @Ricardo is doing since he has lost about 25% of his gold value!?
That value is in "dollars" which are worthless, anyway. The metal is still shiny!
Posted by: Nick at April 16, 2013 08:15 AM
The price of gold commenced a textbook super-exponential blow-off trajectory in '09-'11, reaching terminal velocity and price in the $1900s. The "anti-bubble" trajectory and bearish Elliott Wave and descending triangle patterns project targets in the $1000s-$1100s to as low as the $800s-$900s (US$ par) in the months (year or more) head.
Moreover, gold has become hopelessly hyper-financialized (as has just about everything else) via HIGHLY leveraged paper/digital proxies, e.g., futures, ETFs, etc.; therefore, a deleveraging of paper/digital gold proxies will exacerbate the cyclical correction of speculative excesses in the gold market.
Similarly, oil equities and Cushing oil have completed terminal technical price and momentum projections, suggesting the XOI entering a bear market to retest summer '10 and '11 lows (if not eventually the '08 lows), as well as the price of oil falling to the $70s and eventually the $40s-$50s during the next global deflationary
recession (in spite of, or because of, Peak Oil).
Thus, global oil demand and production have likely peaked for the cycle, as have producers' revenues and profits.
Tangentially, Millennial demographics imply that the homebuilders have gotten ahead of the demographic cycle (thanks to artificial price signals from banks holding properties off the market, speculative cash buyers, etc.), as starts will trend at no higher than the 900,000s (well below the post-WW II avg. of 1.5 million) and new house sales in the 400,000s (lower during recessions) for years to come. The buy-up and vacation house cycle continues lower into '16-'19 and the mid- to late '20s respectively.
The resumption of the secular bear market for equities, peak Boomer demographic drag effects (secular consumption of accumulated financial wealth), and ongoing weakness in housing and associated consumer spending will defy attempts by the central bank and gov't to "stimulate" an economy overburdened with debt, regressive labor taxation, overvalued assets, low real rates discouraging bank lending and private investment, and little or no growth of private full-time employment per capita.
Posted by: Bruce Carman at April 16, 2013 08:44 AM
After a couple years of being entirely wrong about "imminent" hyper-inflation, you'd think the gold bugs would finally update their priors. Maybe the sell-off is a realization by some bulls that their theories aren't quite right. Maybe.
Posted by: Brian at April 16, 2013 09:11 AM
Thanks for thinking of me.
In the recent drop in gold I made out like a bandit!!!!
About 18 months ago the FED stopped increasing its balance sheet (see professor Hamilton's graphs in his earlier post.)
Now to be fair, I do not invest in gold. Gold is a horrible investment for two reasons. First, at its best over time it simple tracks with inflation and good investment beats inflation. Second, as the recent decline demonstrates, there are forces outside of markets that influence gold so, while you can recognize it after gold makes its move, it is almost impossible to see it before gold moves. Remember gold is a leading indicator, so it changes before other indicators show the change.
I made out well because I watch and invest in oil based on what gold is telling me. Gold has been telling me to look out for about 18 months(sound familiar). Over that time I went about 90% short in oil before the crash came (I must give Steven Kopits a h/t on this. Steven, maybe one day we can have lunch on me. I owe you that!)
Thanks for thinking of me, but life is good, and my investment strategy is still on track.
A caution, this drop in gold is similar to 1980, 1989, 2000, and 2008. Following each of these events, equities fell significantly (probably due to deflationary contractions per Mundell). Just be careful.
Posted by: Ricardo at April 16, 2013 09:15 AM
Ricardo: That surely can't be the reason you anticipated the decline, since for the past four months, the Fed's balance sheet has been expanding at a noticeable pace. All you need to do is look at this Cleveland Fed graph which is updated weekly on what is called the internet.
Posted by: Menzie Chinn at April 16, 2013 09:36 AM
I vote for a conspiracy or just normal cutthroat currency market operation. Abeconomics had to help get the ball rolling. It is now apparent the gold run was a direct result of low interest rates. (The end of the liquidity trap / rising rates would severely hurt the price of gold)
Posted by: Preserve at April 16, 2013 09:42 AM
While gold has a special place in the hearts of a certain kind of person (whom Menzie is attempting to tweak), the collapse in gold price is in parallel with a general downward trend in commodity prices.
So, what is the larger phenomenon of commodity price collapse all about? Lack of growth in China? Leading edge of the next recession?
Posted by: Buzzcut at April 16, 2013 09:43 AM
@Buzz, "So, what is the larger phenomenon of commodity price collapse all about? Lack of growth in China? Leading edge of the next recession?"
Yes and yes.
Posted by: Bruce Carman at April 16, 2013 10:03 AM
The CRB:industrial Raw Materials index is back below its 31 Dec 2012 level.
Posted by: Spencer at April 16, 2013 10:25 AM
There can be many underlying causes but the proximate one, IMHO, is the bitcoin fiasco made enough people wary of investing in "alternative" or "real" currency, with those in quotes to represent how bitcoins and gold have been portrayed. Some of the speculative investment in gold was shaken by the potential of a sudden fall, even of others believing the runup has created a bubble. That becomes self-fulfilling because you want out before the others realize.
Posted by: Jonathan at April 16, 2013 10:26 AM
:( you are a bad libertarian! I fully expected that you would have all of your savings in Krugerrands.
On a serious note, I agree with Carman's assessment of gold hitting the end of its bubble phase.
Has anyone written a paper on why people are attracted to shiny metals when the stock market tanks? I guess I can see a path of "I sold all my equities in September 2008, but I don't want cash in my savings.... GOLD GOLD GOLD!!!"
Posted by: Nick at April 16, 2013 10:36 AM
Gold is always a stochastic bubble, rational or otherwise. People buy and sell it based on what they think others will buy and sell it for in the future.
Posted by: Fred at April 16, 2013 11:34 AM
Don't play stupid! Look at your graph from mid-2011 through the first part of 2013.
Posted by: Ricardo at April 16, 2013 02:08 PM
Gold is powered by global factors and nothing more. People still think in terms of "nation state", but that doesn't exist anymore.
Market states rule now.
Posted by: The Rage at April 16, 2013 02:09 PM
If you really want to know why and how gold declined, take the time to read this. Keep an open mind. Try not to dismiss before carefully thinking about it.
Posted by: William at April 16, 2013 02:17 PM
There is a lot more to why gold crashed than one graph. I don't want to go into all of the reasons because most critics can't get beyond the aggregate fantasy world, but for those who can, look at the details on the ground to see what is happening. For example consider ZeroHedge on gold as it relates to the Cyprus bank fiasco.
Contrary to the shallow thinkers gold traders are really sharp - most are with the world's central banks. With apologies to the UNCF - "a closed mind is a terrible waste of things."
Posted by: Ricardo at April 16, 2013 02:23 PM
Bruce and Buzz,
I agree, yes and yes, but I am not sure you know why commodities are declining or why there is lack of growth in China. Understanding that, helps us understand why gold in particular of all commodities is signaling the next recession.
Posted by: Ricardo at April 16, 2013 02:29 PM
:( you are a bad libertarian! I fully expected that you would have all of your savings in Krugerrands.
Nick, I know you were speaking in jest, but this does seem to demonstrate that you don't know anything about libertarian thought. Libertarian is about political theory not economic theory.
Posted by: Ricardo at April 16, 2013 02:33 PM
Just for the record else where I have acknowledged the projected increase shown in Professor Hamilton's post. My comment was that essentially if the FED does as Bernanke has said it will and the Professor's projection is correct that gold will once again begin to climb.
I don't understand why so many ignore economic history. For some reason John Law, the French assignant, The Weimer Republic and Rudolph Havenstein never existed, not to mention most of South America during the 1970s and Zimbabwe in the 1990s and 2000s. There is so much evidence that massive currency expansion is economically destructive that it takes totally blind faith not to see it.
Changing the way economic statistics are calculated do not change reality. A weakening dollar is a weakening dollar.
Posted by: Ricardo at April 16, 2013 02:51 PM
The futures market is just gambling and there is no way for all of the short positions to deliver the amount of gold or silver they have sold. Over the long run this is about what is money. Governments and Keynesians would like us to think that fiat currencies that can be created out of thin air qualifies as suitable money. But it isn't.
Gold has gone up for a long time. There is nothing wrong with its pulling back, particularly when you see a 7 sigma move that is forced by the dumping of contracts by people who cannot hope to ever deliver if there is demand for the physical. And the physical demand is still strong. A few years from now we will be looking at the postings of the gold bears and wonder how they could have gotten it so wrong. The answer will be simple; these are mostly the same people who missed the massive bubbles in tech and housing and are unable to see the even larger bubble in bonds. And they have yet to figure out that the Dow/Gold ratio is following the same path that it has taken before. Eventually the Dow will fall to the point where it will cost an ounce of gold. Whether that is at a nominal price of $5,000 or $50,000 is not important. What is important is that we are seeing the charade that pretends that fiat money is as good as gold failing.
We need to revisit this some time in the next year or so. I believe that after gold bottoms some time in the next few months it will enter phase two of its secular bull market. From that point on we should see a rise of several hundred precent before we go through another large orchestrated correction that should provide us with the last entry point before the blow-off phase begins. You will know when the bubble has reached its peak when the current bears turn positive.
Posted by: Vangel at April 16, 2013 03:22 PM
Ricardo: If money base expansion causes inflation, and money base expansion is continuing as fast as it has in the past, then why are gold prices declining now? Are you saying that sometime in the future, before the sun burns out, inflation will rise aain? If so, I agree you are right.
Posted by: Menzie Chinn at April 16, 2013 04:50 PM
Posted by: Michael Frazis at April 17, 2013 05:12 AM
I don't think you are dense. How do you explain all of the clear evidence of monetary expansion and currency debasement in the past?
Perhaps I can help you by asking some questions. It worked for Socrates.
When was the last time the price of gold was at $1,370?
Looking at the chart from the Cleveland FED that you referrenced, when did the FED balance sheet begin to flatten?
If the FED does not introduce additional money into the economy, does the money supply expand, contract, or stay the same? (Hint: think lost and destroyed)
When there is insecurity abroad, such as the Cyprus banking crisis, do foreign traders increase their holdings of dollars, decrease their holdings of dollars, or keep their holdings the same?
When foreign traders (and CBs) increase their holding of dollars does this cause the supply of dollars to increase, decrease, or remain the same?
If the mechanism the FED uses to inject more cash into the economy is through bank loans, but borrowers are either overleveraged or reluctant to borrow due to economic uncertainty, what will happen to the dollars pushed into the banks? Will excess reserves increase, decrease, or remain the same?
If the FED restricts its money creation and we know that money is destroyed over time, if foreign traders increase their dollar holdings, if foreign banks are forced to sell their gold holdings, and if the monetary expansion that the FED does engage in simply flows to excess bank reserves, what will happen to the price of gold?
Menzie, I am not psychic. I do not know what gold traders will do from day to day or how much panic will take hold of traders. I cannot predict how much traders will over-shoot buy and sell prices of gold. What I can do is read the indicators. The indicators were clearly telling me that gold was going to fall and so I shorted oil because as a commodity it is effected by many of the same forces as gold.
Right now I am in a holding pattern. I don't know where the price of gold will go from here, but it will tell us soon when it confirms certain events such as the FED returning to balance sheet expansion.
But if events continue as they have in the past and the monetary authorities react as they have in the past we should see gold stabilizing and maybe moving upward slightly. Equities will decline. The FED will panic and return to EQ. After the recent crash in gold and based on the mistakes the FED has made in the past, gold should move back up in price. But my caution again to anyone who would think I am advocating buying gold, NO I AM Not! The price of gold is too dependent on the whims of the monetary authorities. If they wake up tomorrow and change their minds, you can get screwed. There is virtually no demand for gold apart from its monetary use so decisions by the monetary authorities "create" the demand for gold.
Posted by: Ricardo at April 17, 2013 05:57 AM
Besides Bretton Wood, the gold pattern is quiet dull when related to historical events.
But mind you, there are a variety of good reasons as to why gold should be behaving as per expectations:
Technical: Gold is correlated to the Dow Jones, until it is not
An hedge against inflation: Gold price during Law system, Weimar time on above graphic. These times were not sensible to information and moreover to expectations.
Gold during stocks markets crashes: Econbrowser above graphics
Fund management golden rule: Gold is what one purchases when having purchased everything else. The corollary may be closer to the truth, when there is nothing to be invested in, gold is purchased.
The blind faith: Mr Greenspan paper, gold as an index against inflation.
Romantic: No, not this one too easy, the gold shipment from Djibouti to India.
The desperate: One should never argue with the markets
Pragmatic: Gold as a creative accounting value in the Central Banks assets and liabilities balance sheets.
Speculative: front running the CBs broadcasted sales or buying the lows since Central Banks are now the most active speculators in all markets.
Then an existential problem, the Pharaon, the Mayan civilizations were not in short supply of gold. Could something else be of more relevance? The central banks ability to decrease their assets and liabilities that means returning to their bona fide owners their assets?
Posted by: ppcm at April 17, 2013 06:05 AM
Sorry, I noticed that my earlier link to the ZeroHedge post was broken. Try this one.
Posted by: Ricardo at April 17, 2013 06:06 AM
No, I am well aware of the logical fallacies of libertarianism. I am also aware of the general inability of libertarians to understand economic logic and the definition of money, thus the correlation between libertarians and goldbugs.
Posted by: Nick at April 17, 2013 06:23 AM
What about the impressive fiscal consolidation in course (on what the inflation ultimately depends)?
Posted by: A at April 17, 2013 06:38 AM
Ricardo: I repeat, money base is continuing to increase, and yet the price of gold has stabilized and is now declining. So what exactly is the lag structure you are assuming. Long and very variable?
Posted by: Menzie Chinn at April 17, 2013 08:18 AM
"Money" is incredibly hard to define. IMO things gray between money and assets. Even if you define money as currency and electronic currency, financial assets have an incredible impact on the value of currency money. I'm not explaining this well, and perhaps you all know this. But in short, I believe Japan and the US, despite printing money, see little inflation because their economies are destroying (or not creating at the pace it used to) "money" or financial assests that act as "money."
"Money" creation is widely understood even by economists. This is a good article on modern money creation.
Posted by: Anonymous at April 17, 2013 08:45 AM
"Money" is incredibly hard to define...I'm not explaining this well...
You explained it very well. This is something that demand side economists have no grasped whether they are Keynesian or monetarist. Demand side economists have the hubris to believe that they can manage money when they have no idea what money is.
Money is any third party good that will allow/facilitate the exchange of the other two goods. Money is a medium of exchange.
Menzie seems to define it as base money. For a long time it was defined as M2. Austrians have written 7 page articles trying to define money. But even after all of that, none of them know what it is.
Do I know what it is? No, I don't and that makes no difference to me. Gold is the indicator that takes all of the components of the money supply into account and then indicates what is happening to the total supply. There is no need to know the various components if you can see the net impact.
Menzie is locked into a QTM paradigm. He sees only the quantity of money not the demand. Gold is an indicator of both supply and demand for money. That means that the quantity of money can be increasing but if the demand is greater there will be an increase in the value of money, deflation.
Posted by: Ricardo at April 17, 2013 10:33 AM
You repeat your short-term view of economics (I sent you a copy of Hazlitt's ECONOMICS IN ONE LESSON. You should read it.) but that doesn't change history. As long as you fail to explain history, why does your analysis based on the past couple of month have any meaning?
Posted by: Ricardo at April 17, 2013 10:37 AM
All "money" is debt-money, i.e., private promissory note as legal tender for all "debts" public and private, lent into existence by private banks. All "money" is created with an imputed compounding interest claim by the creator/owner, i.e., private banks (and their owners) at effectively an infinite term, the FV of which is face value plus imputed cumulative compounding interest.
All debt-money outstanding (and proxies) is owned by the owners of the banks. Everyone else, including households, firms, and gov'ts, borrow and circulate the debt-money for subsistence.
A $10,000 deposit/loan reserved at $0.05 on $1 at a 5% compounding interest for 30 years, for example, has a FV to the owner/lender of $19,325. Private debt-money growth, i.e., "inflation", of a minimum of 2.2%/year is required just to service the compounding interest to effective term. For a population growth of 1% and replacement, debt-money needs to grow at a compounding rate of at least 3.3%.
But banksters and politicos can't achieve their objectives of rentier profits, financial capital accumulation, and especially imperial wars at a 3.3% inflation of debt-money. Therefore, banks and gov'ts need debt-money inflation of about twice the debt service and population and replacement rate so as to skim rentier profits and grow and maintain standing armies and political patronage.
Thus, debt-money inflation is increased by private banks at 6-7%, which is a doubling time of 10-11 years, permitting rentier margins of 3-4% and gov't spending growth of 6-7%.
The problem is that wages grow at population plus productivity (capital replacement), which is no faster than 3-4%. This differential rate of growth of wages to debt-money inflation historically grows about 30-35 years before an order of exponential magnitude of debt-money to wages is reached and debt-money and debt service can no longer grow thereafter with respect to wages; therefore, a debt jubilee threshold is reached and debt-money must be deflated against wages and GDP.
Over the very long run using the best available data for population and real GDP per capita, economies can sustain long-term growth rates of no faster than population plus capital accumulation/replacement (including land and resources) in terms of labor, which is no faster than 1-2% per capita. Private bank lending and associated gov't spending growth of 6-7% to 10% eventually destroys the purchasing power of labor, discourages production and labor returns (can't compete with rentier gains from debt-money inflation), encourages rentier speculation and concentration of financial wealth to the point that labor and production per capita can no longer grow; therefore, labor and prdduction is incapable of producing at a level and rate sufficient to sustain labor subsistence, let alone service existing and new debt-money inflation.
We reached the jubilee limit bound of debt-money to wages and GDP in '07-'08, which coincided with the onset of a debt-deflationary regime that has hardly begun. Expanding gov't debt-money growth and future claims to wages, production, and gov't receipts without deflating private debt to wages and GDP only postpones the debt-deflationary regime's full effects while real GDP and gov't receipts per capita fails to grow.
Because it takes nearly a working lifetime for the differential growth of debt-money to wages to reach an exponential order of magnitude, the debt jubilee cycle occurs but once in a lifetime, meaning that virtually no one has personal experience with the origin and nature of growth and resolution of the phenomenon.
Such is the case today, as economists do not learn about the capitalist Long Wave (they say it doesn't exist, when it is playing out as I type) nor the nature and consequences of differential exponential growth of debt-money and wages.
Debt and asset deflation of 50% to wages and GDP and increasing returns to labor vs. financial capital thereafter are the only ways out of a capitalist Long Wave debt-deflationary regime.
Posted by: Bruce Carman at April 17, 2013 01:23 PM
Ricardo In one post you said:
I watch and invest in oil based on what gold is telling me
and in a later post you emphasized the point even more:
The indicators were clearly telling me that gold was going to fall and so I shorted oil because as a commodity it is effected by many of the same forces as gold.
Hmmm. So when I look at the history of gold prices and WTI going back to 1986, a few quick tests tell me that the log levels of both time series follow a random walk. Basically they are unit root processes. This is consistent with something that JDH has repeated many times. And you would seem to agree when you said:
I don't know where the price of gold will go from here
Well, I would agree. I don't know where the price of gold will go either. To get all econometricky on you, I did a kwik-and-dirty error correction model check and there is no evidence of any cointegrating linear trend between WTI and gold. And that really shouldn't be a surprise because if there were such a trend one of those hotshot guys at the commodity desk would have figured it out long before you did.
I noticed that my earlier link to the ZeroHedge post was broken.
ZeroHedge, indeed. Why am I not surprised?
Posted by: 2slugbaits at April 17, 2013 02:55 PM
The Fed's "printing money" should be described as banking system liquidation, not "simulus", only not much bank liquidation has occurred since '10.
However, money velocity has collapsed, real GDP per capita has gone nowhere, and stock and corporate bonds are now as overvalued historically (6- and 12-year avg. P/E for the S&P 500) as in '00, '07, '87, '73, 1930, 1890s, and in Japan in '89, '96, and '00.
About 75-80% of the global economy is now poised on the tipping point of the onset of a global debt-deflationary regime exacerbated by population overshoot, Peak Oil, Boomer demographic drag effects, overvalued financial assets, and fiscal constraints that will overwhelm central bank reserve printing and deficit spending. It is "different this time" in that there has never been the convergence of so many headwinds to real GDP per capita on a global scale, apart from the destruction during WW II (hint).
Sell stocks, take your cash away from the banksters, and buy coffee cans, shovels, pitchforks, torches, rope, lighter fluid, wheelbarrows, and prayer candles, beads, or tefillin.
Posted by: Bruce Carman at April 17, 2013 03:13 PM
So, could this be a sign that economies area slowing in the coutries that were driving gold prices (China and India).
I figure that gold is a bubble, however it would take a solid recovery to pop. This could be the beginning of a recovery.
Even if china and india have problems, their (china atleast) overbuying of commodities could bring prices down enough for RoW economies to begin to recover. It depends on how important cheap chinese products are to our economies. Maybe it will free up resourses for more valuable activity (ie, maybe china was overbuying and producing crap with very low or negative margins).
Posted by: aaron at April 18, 2013 08:19 AM
I have really enjoyed your posts, but - there is always a "but" - you post on money was way off base.
All "money" is debt-money, i.e., private promissory note as legal tender for all "debts" public and private, lent into existence by private banks.
Here, what you are describing is currency, not money. One of the problems our monetary authorities have is they look at currency but not money.
All "money" is created with an imputed compounding interest claim by the creator/owner, i.e., private banks (and their owners) at effectively an infinite term, the FV of which is face value plus imputed cumulative compounding interest.
Money has nothing to do with interest. Interest can happen in a barter economy and exchange can happen without interest. Money is a medium of exchange. In Europe in the past there were faires where traders would come to exchange their produce. Those running the faire would offer somekind of medium of exchange (money), printed receipts or even gold tokens. Traders would trade their goods for the money then use the money to trade with other producers. At the end of the faire the traders would either return the money to those who ran the faire in return for goods or simply keep the money to use later. Interest was never an issue.
The problem is that wages grow at population plus productivity (capital replacement), which is no faster than 3-4%.
This simply is not true. Yes, capital does increase wages but there is not cap or floor on how fast this can happen. Japan for example had significant growth, greater than 4%, in the 1950s because of their rapid increase in capital.
Over the very long run using the best available data for population and real GDP per capita, economies can sustain long-term growth rates of no faster than population plus capital accumulation/replacement (including land and resources) in terms of labor...
You totally miss innovation and technology. The intellectual improvements are the most profitable in an economy. These can actually reduce capital investment and still increase wages. Entrepreneurs are essential to capitalist systems. Once again this is a piece that the demand side theorists miss. The entrepreneur is usually an innovator. He discovers a new way of handling or a new way of processing. He cuts cost either by a better use of capital or even a more efficient use of labor.
Bottom line is that money is much deeper than just currency. I believe you could think more deeply about this.
Posted by: Ricardo at April 18, 2013 10:20 AM
Ricardo, with respect, you appear not to understand the post-Bretton Woods increasingly financialized fiat digital debt-money regime, which would make you among the vast majority by design.
We are not living in the era of the Silk Road, Medieval faires, or bills of exchange used by Italitan city-state bankers.
Debt-money absolutely has everything to do with interest, which is what gives debt-money its value. Debt-money exists to create more debt-money from which to receive rentier profits from the incremental growth of debt-money. Today, cumulative imputed compounding interest to total credit market debt owed to avg. term is now equivalent to 100% of US GDP, meaning that all US output is now pledged to the compounding interest claims to total credit market debt owed in perpetutity. US real GDP per capita cannot grow under these conditions of onerous debt service.
Please look at the history of long-term avg. wage growth over secular inflationary and deflationary regimes going back as far as there are data sources. The rapid growth of US wages after WW II to the 1970s was a function of nominal $3 oil (constant US$10-$20) and starting from the base of the Great Depression and the rest of the world in ruin as a result of the mass destruction of WW II.
Despite one of the most capital-intensive periods in human history during the Gilded Age Victorian Depression of the 1870s-90s, the NBER's Index of Composite US Wages shows flat nominal wages, whereas real wages doubled because of surging labor productivity and output and a halving of prices.
Please look at the best available data for real GDP per capita in the long run and over the eras mentioned above for the US, UK, Netherlands, Germany, and Japan.
Innovation and technology are tools and processes that improve the efficiency of production of goods and services. Along with cheap abundant supplies of liquid fossil fuels until 2005, IT technological innovation has been a self-reinforcing force multiplier in the financialziation of the US economy, offshoring/labor arbitrage, and falling labor returns, which have also created a situation in which domestic labor and production cannot compete with rentier speculative gains from fiat digital debt-money expansion. Naturally, capital (overwhelmingly financial capital since the 1980s) will flow to areas of fewer barriers and where the highest returns can be obtained.
However, speculative rent seeking in financial assets to obtain unsustainable debt-money gains of 7-10%/year or higher (well above what production and labor can return) have resulted in GROSS distortions and misallocation away from productive enterprise and returns to labor, so much so that the US has not created net new full-time private sector employment per capita in 30-35 years.
These are results of runaway growth of fiat digital debt-money and the associated financial rent seeking and imputed compounding interest claims to wages, production, profits, and gov't receipts that cannot be serviced hereafter.
We have a system that is now pledged to multiple tens of trillions of dollars of debt-money claims far in excess of the resource, labor, physical capital, profits, and gov't taxing capacity to make good on these claims hereafter.
Further, emerging global resource constraints per capita exacerbate these unserviceable debt-money claims, ensuring no growth of real GDP per capita and eventually contraction along with net energy per capita decline and debt-money deflation.
Despite remarkable improvements in oil extraction techniques and an explosion in debt-money reserves, a tripling of the avg. price of oil since the mid-'00s and China's economy growing at a doubling time of 4-5 years has resulted in a decline in global crude oil extraction per capita and flat revenues for many big oil firms since '07-'08.
If you understand the post-Bretton Woods fiat digital debt-money regime, Peak Oil, demographics, population overshoot, log limits to technological innovation and debt-money growth, and exponential math, you will understand why this is happening and the likely consequences.
Posted by: Bruce Carman at April 18, 2013 11:30 AM
Gold positions are being sold to cover Forex and emerging market stock positions. Russia, India and Brazil have been dropping... India has a huge domestic gold market.
Mining & commodities markets will be hit as financial repression and austerity start to bite down in Europe, America and soon China.
Posted by: MarkS at April 18, 2013 11:50 AM
Is credit card debt money? What if you take out a credit card go and buy goods then default on your debt? Are discount coupons money? If a city issues currency to be used at the local businesses is that money? Is MS, M1, M2, M3 money - all or just one or two or more?
I understand where you are coming from but your view is actually very narrow when it comes to money? Any exchange instrument is money and has some influence on the value of money though usually so small as not to be detected. It is a mystical view of mney to believe that floating a currency somehow changes the nature of money.
Posted by: Ricardo at April 18, 2013 12:52 PM
@MarkS, yes, my fellow cyber-dude, what you describe is the liquidation phase of a bubble and a precursor to a global deflationary recession and likelihood of extreme liquidity preference (cash in hand) and risk aversion, reflecting the onset of a mass-social deflationary mindset which the central banksters and gov't deficit spenders cannot overcome given the Boomer demographic drag effects over the next decade associated with a secular era of financial wealth consumption.
In the US, the annual change of employed males age 45 and older decelerating into historical recessionary territory is an unambiguous marker of incipient recession having begun in Q1 '13 or even in Q3-Q4 '12.
Cash in hand (or in a coffee can, safe, or mattress) is worth a lot more than overvalued stocks, corporate bonds, and financialized commodities proxies in the proverbial barren flat bushlands, mate.
Posted by: Bruce Carman at April 18, 2013 01:39 PM
Please Read This:
Posted by: MarkS at April 18, 2013 04:54 PM
Interesting Alhambra article. Thanks!
Posted by: Ricardo at April 19, 2013 01:28 PM
Ricardo, yes, credit card charges are debt-money with an imputed compounding interest claim for the term of the loan/deposit, whether the term is a few hours or years.
Discount coupons are discount coupons, not "money".
What backs the city's "money"? Is it a fixed supply? Does it have an expiration? Can it be deposited in a bank? Reserved? Lent against by a bank? If not, is it "legal tender"?
We have a "debt-money" system, debt-money's value is reflected by the imputed compounding interest to term, and if you don't concede this and the implications, you don't understand our current system.
But those who own and control the debt-money system don't want us to know, and for good reason. Jeffrey Sachs at the link above in a RARE moment of unsanitized candor describes well the utter fraud of the fractional reserve debt-money system and the sociopaths who run the system at the expense of everyone else.
Whether Sachs will regret later sharing his refreshingly honest assessment is another matter. Let's hope his decision to speak candidly encourages his peers to do the same.
Posted by: Bruce Carman at April 19, 2013 06:39 PM
MarkS, yes, I think what the decline in gold portends is a global liquidity trap, debt deflation, extreme liquidity preference and risk aversion, and contracting debt-money supply less bank cash assets and vault cash.
Cyprus was a dress rehearsal for the big show. Get liquid, and the sooner the better. A cash stash outside of a bank or credit union of six months' worth of household liquidity requirements is a prudent precaution.
The next Bear Stearns, Lehman, and AIG episode will be global and risk cascading, non-linear effects across borders, banks, and regulatory jurisdictions.
We have had more than enough warning to take action. Just do it soon before the mass-social recognition reaches critical mass.
With TBTE banks' offshore derivatives levered at 100:1, all it will take is a 1% decline in reportable counterparty losses against the ridiculous unilateral netting (and self-regulation) in which they are engaged on the basis that the central banks will print infinite reserves as counterparties of last, and only, resort to cover any and all losses from the reckless nonsense in which the sociopathic banksters are engaged.
The TBTE banksters have created a kind of runaway, out-of-control Doomsday Derivatives machine that risks imploding and turning the planet into a bombed-out financial wasteland.
STD = Shut Them Down before they take the world down with them.
Posted by: Bruce Carman at April 19, 2013 07:18 PM
WOW - Bruce Carman what a NUCLEAR BOMB. Thank you so much for that link. I have read several of Jeffrey Sachs books and watched him in the PBS series done by Daniel Yergin (The Commanding Heights) - Jeffrey is someone I deeply respect. These comments coming from Jeffrey is extremely damning, as I would classify him as somewhat of an insider with a deep knowledge of fractional reserve banking and Wall Street.
Posted by: Jeremy at April 20, 2013 01:53 PM