David Hillary wrote:
>
> Bob wrote:
> >
> > David Hillary wrote:
> > >
> > > Bob wrote:
> > > >
> > > > David Hillary wrote:
> > > > >
> > > > > Claude Cormier wrote:
> > > > > >
> > > > > > A recipe for stagflation
> > > > > >
> > > > > > http://www.goldeconomy.com/thepriceofgold_08.htm
> > > > >
> > > > > why oh why do 'goldbugs' seemingly always seem to predict a large rise
> > > > > in the price of gold in the medium term?
> > > > >
> > > > > The price of gold in terms of US dollars has been enaything but stable
> > > > > in the last few decades, whereas, the widespread (near universal) use of
> > > > > USD in the $10 trillion US economy, makes the price of USD stable in
> > > > > terms of goods and services, at least in the short term.
> > > >
> > > > You are comparing "last few decades" to "short term". You may be
> > > > comparing apples to oranges here. I can't say though as I don't know
> > > > how long (or short) "short term" is.
> > >
> > > quarter by quarter, the USD buys about 1% more or less (usually less) US
> > > goods. At bad times the USD might by 3% less than it did before, of
> > > domestic goods.
> >
> > Ok. Looking at charts I can't see calling gold "anything but stable",
> > and this is pricing gold in USD, if you want to compare apples to
> > apples (quarter by quarter).
> >
>
> Sorry bob I can't follow that statement at all. [wasn't gold worth
> $800/oz in the late 80s?
Right. I really short quick spike up and down.
If so the purchasing power of gold in the USA
> would have fallen by around two thirds in a dacade.
Right. That's *government* for you.
The purchasing power
> of the USD in the same time would have only fallen by 15% or so in the
> decade.
Right. But funny you picked the highest really short tempory spike gold
ever made in purchasing power since 1913 for comparison purposes to make
your point. Now you're grasping at straws to make your point.
seems to me that inflationary fears, as they subside and ignite,
> can drive the price of gold in terms of US purchasing power, on one hell
> of a roller coaster.]
Hmmm.... you're picking a specific tiny 10 year period to make a
comparison
and a point without considering or mentioning that the government caused
it.
*Now* do you see why government shouldn't have anything to do with money
or
currencies?
And another thing about that tiny time period spike up in gold's
purchasing
power:
It was a *gain*, not a *loss*.
Aren't you concerned about *what* caused those inflationary fears? Don't
you
want to see that eliminated?
>From AIER's Chart Book (The updated one is now available):
Purchasing Power in the US of Gold and Selected Currencies from
1913-1997:
1913 = 1.0, (the year they started the US Fed and this income tax)
The chart ends about 1997.
Purchasing power calculated from the implicit price deflator for US GDP
and the exchange rates of foreign currencies for US dollars.
Compared money:
Gold
German Mark
Reichsmark
Deutsche Mark
(hey, what can I say? they were having a problem organizing a
dozen of donuts in Germany for a while)
Japanese Yen
French Franc
British Pound
Swiss Franc
US Dollar
Dude, I'm looking at this chart and gold wins hands down. The USD is
a miserable loser. About 5% of it's original value to go! Hell, some
of this fiat stuff doesn't even have continuous lines. Ain't no break
in gold's line. Gold doesn't just _disappear_ like some government
fiats.
On top of that, gold's purchasing power on the right hand side of the
chart is now *above* 1.0. And I think you can guess well enough where
the USD's purchasing power is on the chart. No ..... lower. No ....
lower ... keep going ..... keep going .... now you're getting close.
ok, a little lower ...... ok, close enough.
In terms of overall *steadyness* of purchasing power gold wins hands
down over *all* the fiat currencies. The Swiss Franc being the best
government fiat currency.
Just what part of this do you not understand?
> > > However over 5 years inflation could be high low, zero or negative.
> > > Currency could buy 25% less or 25% more. This magnitude of adjustment is
> > > as much as would be required to adjust the price level of an economy, if
> > > macro-economic shocks required it. The price level cannot jump 10%
> > > overnight or fall 10% overnight. It takes time and dis-equilibrium in
> > > many markets to force price changes. This is why it matters that the USD
> > > is 'attached' to a $10 trillion a year economy -- this economy prices
> > > USD by offering goods and services for USD with inflexible prices.
> > >
> > > >
> > > > > Variable inflation of this currency attached to the economic giant makes
> > > > > the price of gold, an inflation hedge, makes for wild changes in the
> > > > > real price of gold, as expected inflation changes.
> > > >
> > > > Maybe, maybe not. It depends on what country you're living/working
> > > > in. The _*real*_ price of gold would be gold priced in coffee
> > > > (hopefully Capulin, I've been spoiled for ever) or other things
> > > > that have intrinsic value.
> > >
> >
> > > The real price of gold is the quantity of goods and services that can be
> > > exchange for it. The prices of goods and services are in fact fixed in
> > > various fiat currencies, and do not adjust quickly, thus the real price
> > > of gold, in goods and services, is as volitile as fiat currencies, if
> > > not more.
> >
> > The above paragraph doen't make any sense to me.
>
> Suppose in March 2001 it takes US$1000 to puy a basket of goods
> representative of the consumption patters of American households and the
> price of gold is US$250/oz. Then in May 2001, two months later the same
> basket of goods costs US$1030. This statistic, and other
> political/monetary/eceonomic events cause inflation fears to be ignited
> and the price of gold sharply increases to US$350/oz. The purchasing
> power of gold has increased by 36%. Then the situation reverses and the
> prices revert to their original values, and gold's purchaing power
> plumets by 26%. The purchasing power of gold in USA goods can be (and
> is) volitile, moreso than the purchasing power of the USD. If the USD
> was fixed to gold then obviously the situation would be different.
>
> >
> > > > The emergence of
> > > > > inflation when nominal interest payments are heavily taxed, can easily
> > > > > make the real return on savings less than zero, in which case savers
> > > >
> > > > > look for alternative stores of value. Combined with economic uncertinty
> > > > > over the direction of stockmarkets and the real economy, and gold
> > > > > becomes a very good investment, a stocks become risky and poor
> > > > > investments.
> >
> > Not so. All stocks (and economies) in the world do not move in the same
> > direction at the same time. Many stocks of an area where capital is
> > moving
> > out of will go down, but some can go up. Many stocks of an area where
> > capital is moving to will go up.
> >
> > Now, within an area that capital is moving out of:
> >
> > Starting at the beginning of 1973 it took the NASDAQ about 5 years to
> > recover from the bear, the S&P about 7, the DOW about 10. Yet big
> > percentage returns (several 100 percent) (going long) on US stocks
> > where made in gold mining and oil service and equipment stocks in the
> > mean time.
> >
> > That's just one example.
> >
> > It all depends on where the *earnings* gains are.
> >
> > An accumulation of capital somewhere can mean good earnings
> > because capital goes where it's best treated.
>
> Mascroeconomic shocks have aggregate wealth/income effects and also
> sectorial effects, moving resources within the economy. Deflation causes
> most asset prices to fall sharply (e.g. real estate) and causes
> resources to be allocated to exports and import competing sectors. If
> you can predict the shock before others you can, by moving your
> resources within the economy (generally buying shares in the right
> industries), profit when others are making losses. But the aggregate
> effect of most macro-economic shocks that involve deflation is to reduce
> wealth and output.
> >
> > > > > This makes gold a poor currency for a small open economy to adopt, and
> > > > > makes gold a poor unit of account, measure of value and store of value.
> >
> > I can't see your reasoning at all.
>
> You have to kiss goodbye to price level stability AND exchange rate
> stability if you are a SOE and you fix your currency to gold. New
> Zealand currently has price stability and suffers from exchange rate
> instability. The Hong Kong economy has exchange rate stability but
> suffers from price level instability. If a SOE was to fix its currency
> to gold, it would enjoy neither price level stability nor exchange rate
> stability. Go figure.
To make you first statement above about "price level stability",
you have to know how much of trade with other countries the SOE is
doing with fiats that are declining in value,
how much trade the SOE is doing with fiats that are increasing in value,
how much trade the SOE is doing with gold, what percentage of trade is
being done in gold, what percentage of the economy is trade. Only then
do you get to see the effect on the SOE's economy of exchange rate
changes.
Plus, an SOE using gold would not be "fixing" it's currency to gold.
It would be using gold itself as money. The SOE would not have a
currency.
> > > > > If gold were the general means of exchange in a large open economy or in
> > > > > a closed economy, its performance as a unit of account, measure of value
> > > > > and store of value would be much better.
> > > >
> > > > I don't see how size has anything to do with it.
> > >
> > > Small open economies cannot affect the world interest rate or the price
> > > of gold, their economic activities are not significant enough to do
> > > this.
> > So what? What matters is what most of the SOE's economy is comprised of.
> > *How* the people create their wealth.
>
> What is important is that the currency and money provide a transaction
> cost minimising medium of exchange.
>
> >
> > Large economies savings rates and other variables can affect the
> > > world interest rate and the price of gold.
> >
> > Sure, but so what. Gold's interest rate has almost always been the
> > lowest
> > despite how bad other currency interest rates have gotten. Except for
> > the
> > Yen right now you have to go back several hundred years to find a
> > currency
> > with an interest rate lower than gold.
> >
>
> Gold's interest rate is low partly because debtors do not seem to like
> gold denominated debts, inhibiting the demand for gold debt.
It's not because debtors don't like gold denominated debt. It's because
the chances of the loaner getting screwed by the government are low.
If the whole world used gold as money, gold's interest rates should
generally be just as low as they are today.
Debtors
> know that if the USD or Euro or Yen were to be plagued with inflation
> fears, their debts, in terms of their own output prices and input prices
> would increase markedly.
Debtors also know they get to pay back dept with cheaper fiat currency.
The number of fiat the debtor owes hasn't decreased, but the value of
the
fiat the debtor owes *has* decreased.
> > > > > The adjustment required of a small open economy that adopted gold as
> > > > > money would be difficult and painful.
> >
> > That is quite the blanket statement to make without knowing where in the
> >
> > world the SOE is or what countries it does most of it's trade with. And
> > remember a rule of thumb for big economies is that trade takes a back
> > seat
> > to the domestic economy as a % of GDP. Trade is about 1/4 to 1/3. Trade
> > in this SOE could be a lot smaller of a %. Or maybe most of the trade of
> > the SOE is with a country or countries that are having relatively stable
> > prices. Like successful countries or economies (sometimes cross border).
>
> Give one example of significant inflation or deflation that occured
> (where the currency is fixed to a commodity or other currency) without
> either crashing/inflating the property and equity markets, causing
> labour shortages or unemployment or causing an over-building boom or
> recession.
I don't understand your request above. Gold isn't fixed to anything and
it's not a currency.
There's all kinds of reasons for large price movements either way. You
have to talk about specific examples and the point in time when it
happened.
Prices are information that people need to make wise choices.
Governments
screw up, distort prices. Sometimes a lot, sometimes a little. Therefore
people can make not so hot buying decisions which in turn may increase
price volatility even more.
> > If US inflation and inflation
> > > > > fears were ignighted, the real exchange rate of the SOE would rise very
> > > > > sharply, and require downward adjustment of wages and prices in the SOE.
> > > >
> > > > Huh?
> > > >
> > > > The price in gold (priced in USD) wouldn't affect local business within
> > > > the SOE (small open economy) that is using gold as money. Who cares
> > > > what the price of gold in USD is if locally I'm getting paid in
> > > > gold and spending gold. If there's an inflation problem in the US,
> > > > and the SOE wants to buy some US goods or services, that's not much
> > > > of a problem. The money of the SOE (gold) has been buying more
> > > > USD to be able to buy the US's goods and services, as the prices of
> > > > goods and services have been going up (in USD, not gold) in the US.
> > > >
> > > > On top of that, if the SOE has been using gold for .. say 2 decades,
> > > > it's probably got a hopping, maybe screaming economy because it
> > > > has been attracting capital (including brains) because of it's more
> > > > stable prices, businesses are able to do better (compared to the
> > > > US) planning because of more stable local prices.
> > > >
> > >
> > > gold for money fixes the nominal exchange rate with other economies to
> > > the price of gold, in terms of their currencies. If inflation fears are
> > > ignighted in a large open economy, the price of gold will rise, as will
> > > the nominal exchange rate of the SOE. This exchange rate movement has
> > > almost nothing to do with the factors that equilibriate international
> > > trade and finance for the SOE. Thus the appreciation of the nominal
> > > exchange rate leads to downward pressure on domestic prices (deflation).
> > > Thus the real effective exchange rate is arbitrarily jacked up,
> > > exporters and import competitors go broke, deflation drives the real
> > > interest rate in the SOE sharply upward, asset prices crash and a
> > > recession is likely to occur.
> >
> > Sure there *can* be affects on the SOE but maybe *none* that matter.
>
> Of cause mal-investment, recessions, and misallocation of resources
> between sectors of the economy do not matter, what matters is that gold
> is used as money. Sure Bob.
See above.
And, nobody that I have heard of that promotes gold as money has ever
said that it will eliminate business cycles. If the whole world used
gold
as money the markets should become a relatively boring game to play.
Business cycle variations should be a lot less. Governments would no
longer be able to cause big price movements, which are profit making
oportunities.
> > > The nominal exchange rate has large effects on SOEs, and the allocation
> > > of resources between tradables and non-tradables sectors.
> >
> > *May* have....
> >
>
> You wouldn't happen to live in the world's largest economy would you
> Bob? Trade and the exchange rate and foreign investment are the
> lifeblood of small open economies and the nominal exchange rate has
> large effects on the allocation of resources within them, and the
> investment/business environment they provide.
Careful. There are hardly any SOEs in the world to make a generalization
from. Making a generalization from a particular or two doesn't cut it.
> > Open economies
> > > are not immune to foreign events.
> >
> > Right. And there are degrees of immuneness.
> >
> > > > > This deflation would cause land and building prices to collapse.
> > > >
> > > > No.
> > >
> > > Yes, deflation and inflation,
> >
> > No. You haven't a clue what this SOE is about. So you can't use the
> > word "collapse". So you don't have an objective leg to stand on.
> >
>
> All economies have capital assets, the majority of which are dwellings,
> buildings and other structures (A$1 168 billion out of total
> non-financial fixed produced assets of A$1 512 billion in Australia at
> 30 June 1998 according to the Australian System of National Accounts,
> National Balance Sheet, ABS 5204.0 1.15). Construction of these assets
> is the majority of investment activity. Investment is the most volitile
> component of GDP. The wealth effects of changes in the value of land and
> these capital assets has significant effects on private consumption.
> Inflation and deflation and the forces that bring them about allow
> analysis of the effects of inflation and deflation under a fixed nominal
> exchange rate (whether fixed to another currency or to a commodity).
> This analysis shows that inflation causes asset price and construction
> booms and deflation causes asset price crashes and construction activity
> to contract dramatically. I know that if an economy is hit by a shock
> requiring the real exchange rate to fall via deflation, asset prices
> will "collapse" or sharply reduce.
>
> > when the nominal interest rate is fixed at
> > > the world interest rate
What is a "world interest rate"?
or a large economy currency interest rate, has
> > > very large effects on asset prices. If the demand for fixed assets is
> > > expected to grow in nominal terms by 5% p.a. along with inflation and
> > > replacement costs, and the nominal interest rate is 5%, the that is the
> > > same as a zero discount rate with price stability. An asset expected to
> > > last 20 years will be worth 20 times the current annual hire. If the
> > > interest rate stays at 5% but price stability is expected, the asset
> > > falls to 13.09 years hire. If the price level is expected to fall 5%
> > > p.a., the asset falls to 9.08 years hire. I guarantee that the property
> > > market will crash in Ireland when the inflation ends and the deflation
> > > starts and the nominal interest rate is about the same. Inflation and
> > > deflation have consequences.
> > >
> > > >
> > > > The
> > > > > inflation and deflation in a SOE that used gold would be significant and
> > > > > arbitrary, and cause asset prices in the SOE to be highly volitile.
> > > >
> > > > No.
> > >
> > > If the price of gold in terms of other currencies rises and falls
> > > substantially, as it does now, a gold economy will suffer appreciations
> > > and depreciations of its exchange rate which will force price level
> > > adjustments to occur. Price level adjustments will inflate or deflate
> > > asset prices.
> >
> > Yes. But by how much? You simply can't say. Because you have no
> > information
> > about this SOE. People can get by just find with some price changes,
> > anyways.
>
> People can get by with fiat currencies, public schools and income tax.
> That does not make these optimal.
>
> >
> > > > The
> > > > > situation would be similar to SOE such as Hong Kong, where the currency
> > > > > is fixed to the USD.
> > > >
> > > > No.
> > >
> > > Hong Kong's nominal interest rate and nominal exchange rate are imported
> > > from the USA. Thus if Hong Kong's Trading partners currencies depreciate
> > > against the USD, the HK dollar appreciates against its trading partners
> > > and its real effective exchange rate rises. If this appreciation was not
> > > warranted from HK fundamentals, HK price level must fall. This is what
> > > happened in 1998-2001, and HK has suffered deflation of 3-5% p.a. during
> > > this time, ending inflation of 4-6% p.a. (and crashing the property
> > > market and causing a deep recession in the process).
> >
> > My response is still: no. HK is a bad example to use. Too much of it's
> > GDP
> > is based on trade plus it uses fiat.
>
> HK is an open free trading economy, its currency is fixed to the USD.
> This provides an example of a SOE which has a monetary policy and
> interest rate which has no relation to its output gap or
> inflation/deflation, as would occur if a SOE were to fix its currency to
> gold. Thus interest rates may be high when the real exchange rate is
> overvalued, deflation is occuring and ther is significant spare
> capacity, or interest rates may be low when the real exchange rate is
> undervalued and inflation is occuring. This pushes the economy to its
> limit, testing its ability to adjust and self-correct. An SOE fixing its
> currency to gold would be similarly subject to such testing, I think
> even moreso, as gold is not currently fixed to any major currency and
> can fluctuate against major currencies more than the major currencies
> fluctuate against each other.
>
> >
> > > > Property prices fell by around 40% in 1998 in Hong
> > > > > Kong as inflation turned to deflation. Unemployment rose from about 2%
> > > > > to over 6%, real GDP fell by over 5%. By contrast Taiwan and Australia,
> > > > > both highly exposed to the Asian Crisis, continued to register
> > > > > significant growth and asset prices did not crash and unemployment did
> > > > > not rise. This is largely because their nominal exchange rates fell,
> > > > > reducing the need for adjustment and the extent to which sticky prices
> > > > > cost output.
> > > >
> > > > I can't say one way or another about the above.
> > >
> > > The real effective exchange rate (REER) is a combination of the nominal
> > > exchange rate and the differential inflation. Where the nominal rate of
> > > a SOE is fixed, wheather to another currency or to a commodity,
> >
> > Why would the nominal exchange rate be fixed?
> >
> > > adjustment cannot occur in the REER except by differential inflation. So
> > > kiss goodbye to price stability if your SOE fixes its exchange rate
> > > either to another currency or to a commodity. And BTW, hold your wealth
> > > in financial assets diversified accross economies if you live in Ireland
> > > or HK or such a SOE, because the house you live in (don't own it) and
> > > the shares in your local service companies will be anything but safe
> > > investments when inflation turns to deflation!
> > >
> > > David Hillary
> > > >
> > > > Bob
> > > >
> > > > "We assume that the currency which is in all our hands is fixed,
> > > > and that the price of bullion moves; whereas in truth, it is the
> > > > currency of each nation that moves [i.e., loses purchasing power],
> > > > and it is bullion which is the more fixed [i.e., maintains
> > > > purchasing power]." - Henry Thornton, An Enquiry Into the Nature
> > > > and Effects of the Paper Credit of Great Britain, 1802.
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