Sunday, August 2, 2009

Anonymous Gold Fan Out To Lunch

For those who followed my post on Janet Yellen as Fed Chair, an anonymous fan of the gold standard (he did not like the title "gold bug" and says he does not know how to buy gold) showed up claiming that a 1988 paper by Barsky and Summers in the JPE on "Gibson's Paradox" showed that the price of gold was being suppressed and needed to be set free. He went on at length about this. So, I went and looked at the paper.

So, Gibson's Paradox is a supposed relation between the price level and the nominal price of gold, along with the level of the long term interest rate(s). Of course, Irving Fisher argued that it was the rate of inflation that should be tied to nominal interest rates. So, Anonymouse Gold Fan argued that B and S had shown this relation to hold and that this explained Fed policy since 1995. Baloney. What B and S found was that this paradox held during the period of the high gold standard, 1821-1914. It held weakly during the Bretton Woods period of 1945-1971. Otherwise, it has not held. Anonymous Gold Fan is Out To Lunch and misrepresenting papers to push nonsense, big surprise.


Barkley Rosser said...

BTW, the original fixation on gold dates back to Ancient Egypt, where it was viewed as divine, being both inert and thus "eternal" and as the only metal that is yellow, representing the divine power of the sun god, Ra, whom the pharoahs claimed to be.

So, those who are fixated on gold are just pushing forward worship of an ancient Egyptian god who was identified with absolute state power. Great stuff.

And, our dear Anonymous also claimed that gold is real money unlike paper, used for all the functions of money, including as a medium of exchange. If you are reading this, A., I challenge you to try to buy yourself a Big Mac with some gold. Duuuuuh.

Anonymous said...

I did not notice you had opened a new thread on this, so I mistakenly posted my response to the old thread:

Summers and Barsky, section V. Summary and Conclusion: "The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term interest rates are indeed associated with the movements in the relative price of gold in the opposite direction and this effect is a dominant feature of gold prices."

This, of course, no longer holds since Rubin and Summer went to Washington...

And, of course, not being ideologically hobbled by being an economist, I came to the same conclusion based on simply logic: If the price of gold could reflect changes in price levels, people would soon figure out that gold was an superior alternative to fiat.

Example: suppose in 1990 you could buy a house for $150,000 or 300 ounces of gold; and, in 2007 buy that same house for $260,000, or 300 ounces of gold - which would you choose as your preferred form of savings?

The obvious answer is gold.

So over any given period of time, the price of gold has to be depressed to some general range of prices, in order to prevent a general flight to the commodity.

And, once I reached that conclusion, I went looking for evidence gold prices had been manipulated...

Daro said...

The current collapse was easy enough to spot even 5 years back but I confess i'm lost about the future price of gold. Alarmists clamour that gold will hit $3000 sometime soon while others note that since currencies were taken off the gold standard, it will simply appreciate like just any other commodity. I don't see the beauty in buying gold. It's a mineral that sits on your desk generating zero income and even if its price skyrocketed you wouldn't want to sell it since that means dollars are becoming increasingly worthless. And as Mr. Rosser points out, it's a bit hard to buy a newspaper with ingots of gold unless your willing to take a big loss on the deal...

Anonymous said...

"And, our dear Anonymous also claimed that gold is real money unlike paper, used for all the functions of money, including as a medium of exchange. If you are reading this, A., I challenge you to try to buy yourself a Big Mac with some gold. Duuuuuh."

The obvious intent of gold manipulation by Washington is to discourage its use as medium of circulation. Thus, were I to buy a donut with gold, I would be paying far more value for the donut than it is worth, given current depressed gold prices.

At all times, the fiat price of any good must be less than the gold price of that same good, for the fiat to work.

And, it should be just as obvious, that were the gold bugs to gain their wish, and gold were to replace fiat, Washington would lose control of both monetary and fiscal policy, along with the seniorage dividend and the artificially high dollar exchange rate - which latter makes possible its unbalanced trade position.

In other words: the moment gold or any other substitute replaced the dollar as world reserve currency, the global economy would wink out of existence, and the gold coin simply reduced to a pretty, if mostly useless, metal.

Barkley Rosser said...


Hmmm. So, when gold hit $1000 an ounce earlier this year, interest rates were near a long time low. Does this fit your argument, or is this just evidence that the Fed is manipulating the price and that is way too low a price?

Actually, gold has never ever served as a general medium of exchange anywhere. Why? Because it is too rare. Because of its rarity and inertness, it has been a classic store of value for monarchs and the wealthy in past eras before modern finance. When we had $20 gold pieces in the US that got used, that would buy one something quite valuable, like a horse. One never bought dinner with gold anywere, ever.

I am not necessarily against some sort of commodity standard of value for the dollar. But tying it to one commodity, especially one with as ridiculous and farcical a history as gold, is nonsense. A better idea would be some bunch of commodities that cover broad sectors of the economy, such as the proposal of Leland Yeager about 20 years ago or so (longer ago, I think). His were things like wheat, copper, plywood, and oil, or some such group, a lot more practical than gold.

And, unlike the distant past, gold actually does have uses in our modern electronic economy. Better to let its price be set in the free market for such uses (as well as the old bauble uses) than getting it all whacked out by trying to turn it into some sort of official international standard of value, which, btw, there is no government in the world pushing for right now, not even those of the gold procucers like Russia or South Africa.

Ain't gonna happen, and not because of some conspiracy by all those evil people at the Fed.

Anonymous said...


My own personal guesstimate is that the fiat price of gold is probably on the order of 70-100 times lower than it should be, so variations on the order of $300-$1000, or even $3000, as someone here mentioned, amount to a rounding error.

I base this guesstimate on the change in the median fiat price of a single family home between 1950 (about $3000.00) and 2006 (about $260,000) - I believe home prices are a relatively good proxy for price levels generally.

Precious metals have typically not served as medium of circulation since the Chinese invented paper money in the 1200s(?), however, for obvious reason, gold has been the premier form of exchange between nations, and necessary for such undertaking by the state as war on foreign soil - Niall Ferguson has an interesting take on this in his series, "The Ascent of Money."

The fact that gold has non-monetary uses is, of course, the point of Summers' paper: he wanted to know under what circumstance gold gets diverted from non-monetary uses to monetary use.

I would expect that no government would be interested in gold as a commodity-money, or any commodity-money at all, since it would immediately deprive them of their ability to control economic events.

The dollar - and all other currencies - were debased from gold because without this debasement the state cannot expand the social hours of work beyond its material maximum - paper money makes it possible for the state (and capital) to force working families to slave away for unnecessarily long periods.

The people at the Fed are evil - and, once you understand this, you will no longer be their zombie...

Barkley Rosser said...


I think you meant to write "70-100%" not "times," which would imply a price of gold of $70,000 or up per ounce. Not.

2006 was the absolute peak of the housing bubble. Where have you been? We are now back down to the long term price-rent ratio nationwide, so prices now might be about right, down substantially from 2006. So, if that is your measure, you are still way over, even doing it by percents rather than times. Current price of gold may not be all that off, based on your argument.

Oh, and for the record, even if Summers wrote a paper back then on Gibson's Paradox, he has never supported going back to the gold standard. At most he has probably supported the idea that the Fed should keep an eye on the price of gold, just as it keeps eyes on the prices of lots of other things, but not to use it as any official part of policymaking. He has never supported that, not before he went to Washington or since.

Again, if you want to argue about a conspiracy of the Fed or its allies to keep gold prices down, why do we not have gold exporters like Russia and South Africa complaining or pushing some increase in the role of gold in policy. Do you think the Russian government is under the thumb of these conspirators? I note that they have been dumping dollars for euros and have called for a reduction of the role of the dollar in the world economy, but not a whisper about reviving any role for gold.

Sorry, but your argument really does not have a leg to stand on, not at all.

Anonymous said...

$70,000 per Oz. of gold or so sounds about right...Just a quick and dirty guesstimate.

I did not make a mistake. When I said that if gold was actually to reflect its real value the economy would wink out of existence, I was not employing hyperbole.

As to the price-rent ratio, if the dollar has negligible and falling value it is expressed simultaneously in all prices of all goods and services, including rent. So we get nowhere by comparing what it costs to own versus rent a home.

I never held that Summers argued to return to the gold standard. What I did argue - or, rather, conveyed - was research that shows the Gibson Paradox disappeared after he and Rubin arrived in Washington.

As to official policy tools, the role he played in both the deregulating the derivatives markets and in repealing the Glass-Stegall Act speak for themselves. Was this official Fed policy or not? Did not Alan Greenspan testify for it or not?

Did it not lead to our present catastrophe?

I believe I stated no government want gold as money - that included Russia and South Africa.

Frankly, by your response, I don't think you know what my argument is - you are pretty much batting .000 - but to refresh your memory, I will restate it:

1. The Fed is not an innocent bystander, or negligent bank regulator in this financial crisis: They engineered the events which ultimately led to this catastrophe.

2. Wall Street works for Washington, not the other way around; and, was only implementing Washington's directives. They are the hired help, and the mere transmission belt for Washington policy.

3. Wall Street has operated through this crisis as unrepentant, because they were promised they would be made whole on their losses. They have a "get out of jail free" card.

I have no way of knowing that the above is true, but it is the only hypothesis I can find which accounts for what we are observing:

a. Billions of dollar in bonuses being paid out by companies who are on life support, open manipulation of the stock market, abrogation of such important business practices as "mark to market"

b. No one going to jail? Despite trillions of dollars in damage to the financial system, and the global economy.

c. The criminal gang which devised the ponzi scheme are right now advising the President on how to fix it.

I would really like to hear your alternative hypothesis...

Barkley Rosser said...


This will be my last reply to you.

Your complaints about deregulation are reasonable. However, they are unrelated to your other arguments, as your lack of mentioning gold prices in the latter portions of your last comment indicate.

Your first two paragraphs or so completely discredit you. We are supposed to take $70,000 per ounce even remotely seriously? Are you hoping to fly faster than the speed of light in your lifetime? Have you mistaken a solar eclipse for the long term intentions of your favored Egyptian sun-god Amun Ra?

I am unaware of any economic theorist in world history, even the most insane, who would agree with the statement: "if gold was actually to reflect its real value the economy would wink out of existence."

Have a nice day and the rest of your life.

Anonymous said...

A few points, and then I will turn you loose to return to your role in destroying the minds of young Americans:

1. The Gibson Paradox is about the fiat price of gold. So your argument that I did not mention the price of gold is wrong. (You might explain, yourself, why we passed through the period known as the Great Moderation...)

2. The statement, "if gold was actually to reflect its real value the economy would wink out of existence," reflects the fact that fiat money is essential to creating jobs which produce nothing, create no value, and only consume value. You might get Sandwichman to explain to you the concept of superfluous labor time - a term which you might recognize under its Keynesian moniker as "increasing aggregate demand."

To be real simple about this, since you do not seem to be able to understand complex ideas: Washington has been encouraging the growth of credit as a means for creating a mass of workers whose economic function in society is not to create value, but consume it. This consumption is vital to maintenance of a work week which may be 30-35 hours longer than it need be.

This superfluous mass of workers could not be sustained without paper money - we would be facing unemployment on a scale that is unthinkable - perhaps as high as 85 percent unemployment.

Needless to say, were something to upset this system the entire global economy would disappear, and both Wall Street and US military spending with it: The American empire rests on the paper dollar.

One other thing:

The mechanism which kept the dollar in this role is broken; Washington's mechanism is broken. That is what this crisis was.

It will not be recovered.

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