Gold Gives You Extremely Important Signals
Gold Gives You Extremely Important Signals
February 17th, 2013
(Excerpts from article)
L.S.: However, you support a commodity price rule for monetary policy connected to gold.
D.P.G.: Yes, sure.
L.S.: Could you explain the concept behind that and why you support it, please?
D.P.G.: This is an idea that was advanced by Robert Mundell, but actually it goes all the way back to David Ricardo’s idea of the gold standard. Robert Mundell, of course, is the father of the euro and the father of supply-side economics, he’s a Nobel Prize winner, and he has been the most prominent economist advancing this idea; he has talked about it for roughly the last thirty to forty years. The idea is pretty simple: to create some kind of objective market-based rule which would limit the ability of central banks to create money and to debase their currencies, or on the other hand to act as a break against deflation. In other words: to use market observations of auction prices that reflect expectations of the overall price level in order to correct central bank errors.
There has been an enormous amount of debate for centuries now about what the criterias should be for central bank money creation and how important that is. Mundell’s argument is that the quantity of money is much less important than the way the market responds to central bank increases in high-powered money or in bank reserves and how that affects expectations of the price levels. So central banks should listen much more to the market.
And gold among all the commodities probably gives you the purest signal about future price expectations. There is a very simple reason for that: the amount of gold in stockpiles is many times – 25 to 30 times – annual consumption. So a change in desire to hold gold as an investment is a much more important determinate of the gold price than changes in current mining supply or changes in current consumption of jewelry or industrial applications. If you use copper or platinum or bauxite or other commodities, the stockpiles are extremely low relative to current use. And you also might have a technological change or an economic slump or a big increase of demand which would drastically affect the prices. So it’s much more difficult to interpret price signals from industrial commodities as an indication of expectations about the future price level. Gold gives you much better information. So it certainly has pride of place among all commodities as an indicator of expectations about the price level and as a guide to central bank activity.
That idea of a commodity-based standard which is to create confidence in the market place and to correct for central bank errors is the core of Mundell’s concept. I think it is an extremely good idea and I firmly believe monetary management in general would have done much better if we would have followed Mundell’s view and not the guess work of central bankers.
Certainly errors committed by the Federal Reserve in monetary policy contributed to the development of the financial bubble during the 2000s. During 2003, as you recall, the Federal Reserve eased because they were afraid of deflation – there was a big drop in the bond yield and they saw it as a deflationary signal. At the time my department at Bank of America produced a large body of research, arguing that this was not a deflationary signal, that the Federal Reserve was in error, and the Federal Reserve’s ease was mistaken. Therefore, I can think of a number of instances where the Federal Reserve would have been much better off to watch the gold price rather than bond yields or consumer price indexes or other things that they were watching.
more at http://www.larsschall.com/2013/02/17...rtant-signals/
Re: Gold Gives You Extremely Important Signals
The problem with this theory is that the gold price is too easily manipulated in the short- to medium-term. For instance, the gold price has been on a downward trajectory for nearly 18 months. The signal to central banks would be that it's okay to juice the money supply, because gold is telling us that inflationary pressure is not there. Do any of us really believe that?
Re: Gold Gives You Extremely Important Signals
Quote:
Originally Posted by
Sparky
because gold is telling us that inflationary pressure is not there. Do any of us really believe that?
Carl, you there?
Re: Gold Gives You Extremely Important Signals
One could argue that the world is already on a quasi-gold standard. A gold standard means that at any time, fiat currency is convertible to actual gold bullion, and vice versa. The only difference now is that the conversion rate is not fixed, nor is it even very stable. As the money supply continues to increase over the long run, the gold conversion rate has also steadily increased, but it increases in fits and starts in the short run because of speculation.
One could also argue that because of this, the idea suggested in the article is already in place. Central banks have to limit their printing lest the gold price gets out of hand and people increasingly resort to converting. The US central bank is aware of this. They have gotten away with a lot of printing because the population is generally slow to convert their fiat. But they are aware that they are at risk of letting the cat out of the bag.
Two interesting aspects of our current quasi-gold standard:
1) Citizens (i.e. fiat users) have historically been slow to recognize the power and responsibility they have in keeping fiat in check by exercising their right of convertibility. But the price of gold rose 500% in a decade, so is certainly a lot of "concentrated" participation going on.
2) Convertibility is distorted and impeded by: a) the cost to convert, which is a 5-10% buy/sell spread, b) capital gains taxation, c) sales taxation in some states, d) reportability and privacy issues from Patriot Act type measures.
Aspect #2 is really what makes it currently a "quasi" gold standard. I guess the fact that the price of gold was able to rise 500% in a little over a decade in spite of these impediments is testimony to the level of egregious fiat devaluation that is going on. If central banks get too greedy, the participation rate (Aspect #1) will increase dramatically, which is what really keeps them in check.
Re: Gold Gives You Extremely Important Signals
Quote:
Originally Posted by
Sparky
The problem with this theory is that the gold price is too easily manipulated in the short- to medium-term. For instance, the gold price has been on a downward trajectory for nearly 18 months. The signal to central banks would be that it's okay to juice the money supply, because gold is telling us that inflationary pressure is not there. Do any of us really believe that?
Good point Carl. I agree. These mainstream authors, while providing important insights into central bank monetary policy, totally discount gold price manipulation. I agree with you that central banks are manipulating gold, and not through outright buying and selling physical bullion, the traditional and accepted method. They are working with the Wall Street banks to engineer timed massive short selling dumps to precipitate price cascades.
Re: Gold Gives You Extremely Important Signals
Quote:
Originally Posted by
Sparky
One could argue that the world is already on a quasi-gold standard. A gold standard means that at any time, fiat currency is convertible to actual gold bullion, and vice versa. The only difference now is that the conversion rate is not fixed, nor is it even very stable. As the money supply continues to increase over the long run, the gold conversion rate has also steadily increased, but it increases in fits and starts in the short run because of speculation.
One could also argue that because of this, the idea suggested in the article is already in place. Central banks have to limit their printing lest the gold price gets out of hand and people increasingly resort to converting. The US central bank is aware of this. They have gotten away with a lot of printing because the population is generally slow to convert their fiat. But they are aware that they are at risk of letting the cat out of the bag.
Two interesting aspects of our current quasi-gold standard:
1) Citizens (i.e. fiat users) have historically been slow to recognize the power and responsibility they have in keeping fiat in check by exercising their right of convertibility. But the price of gold rose 500% in a decade, so is certainly a lot of "concentrated" participation going on.
2) Convertibility is distorted and impeded by: a) the cost to convert, which is a 5-10% buy/sell spread, b) capital gains taxation, c) sales taxation in some states, d) reportability and privacy issues from Patriot Act type measures.
Aspect #2 is really what makes it currently a "quasi" gold standard. I guess the fact that the price of gold was able to rise 500% in a little over a decade in spite of these impediments is testimony to the level of egregious fiat devaluation that is going on. If central banks get too greedy, the participation rate (Aspect #1) will increase dramatically, which is what really keeps them in check.
Your point about the responsibility of the people to hold the central banks responsible for overissuance of currency by buying gold is very important. But, this mechanism worked when the middle class was the bulk of the populance and had positive net worth, significant savings, and some understanding of money versus credit. What about today, when the middle class is a shrinking minority, more than half the population has no or negative net worth, no savings and is dependent on government largesse to subsist. And, these people have absolutely understanding of debt and interest or gold as money! I'd say in today's world, the people-driven gold check on central bank overissuance is tenuous and laggy at best.
Re: Gold Gives You Extremely Important Signals
Quote:
Originally Posted by
mamboni
Your point about the responsibility of the people to hold the central banks responsible for overissuance of currency by buying gold is very important. But, this mechanism worked when the middle class was the bulk of the populance and had positive net worth, significant savings, and some understanding of money versus credit. What about today, when the middle class is a shrinking minority, more than half the population has no or negative net worth, no savings and is dependent on government largesse to subsist. And, these people have absolutely understanding of debt and interest or gold as money! I'd say in today's world, the people-driven gold check on central bank overissuance is tenuous and laggy at best.
You make an important counterpoint. Because our quasi-gold standard has a transaction cost, it's really only practical for mid- to long-term capital surplus, and not for money held as part of monthly cash flow. So the burden of responsibility of holding central banks responsible for overissuance can only be realized by the portion of the population with a capital surplus, essentially the super-rich, the rich, and the upper middle class.
But I'll include a fourth group: the would-be middle class thrifty. That would be those have the means to live what we call a middle class lifestyle (which is typically accomplished via debt accumulation), but choose to live below that level in order to accumulate surplus capital. I'd guess a lot of GSUSers fit into that category. They are willing to forgo a lot of the visual and material niceties of the middle class (e.g. costly vacations, new automobile every few years, expansive housing space). By their very nature, this group is more likely to convert to gold than those higher economic classes, though have collectively less capital to deploy.
Re: Gold Gives You Extremely Important Signals
I'm sure the guy is talking about the price discovery mechanism of free markets, except there are none so he wants to see artificial price discovery by observing gold price fluctuations within a tightly controlled band? The thing he wants to correct is the cause of the things he thinks are the cause. I think the easiest and most effective solutions is to outlaw market crashes. Then it's all sorted. The people will have the piece of paper that says it's outlawed so they will be safe and confident. The market will never again crash. U-tow-pe-ah. But anyways, you guys is all overs this stuffs.
What about the global currency devaluation race to the bottom? Does this by default come to an end if they go to a gold standard? Does it require everyone to go to a gold standard for it to work? What happens to those who don't go this route?
This chart suggests that one serious side effect of leaving the gold standard was the real reduction in household wages while productivity and hence economy wealth increased. So household share stagnated while corporate share increased steadily.
http://stateofworkingamerica.org/m/?...7-11.png&w=640
Chart Souce: State of Working America
Re: Gold Gives You Extremely Important Signals
i feel like Gold is extremely stable, while the US $ is coughing & vomiting up blood on its way to oblivion.
