Gibson's Paradox Revisited

[richmtn]

This seems to be quite relevant at the moment. Gold, inflation/deflation, bonds, real rate of return. I could sure use some help understanding this.

 

 

"Lord Keynes gave the name "Gibson's paradox" to the correlation between interest rates and the general price level observed during the period of the classical gold standard. It was, he said, "one of the most completely established empirical facts in the whole field of quantitative economics." J.M. Keynes, A Treatise on Money (Macmillan, 1930), vol. 2, p.198. And it was a paradox because contemporary monetary theory, largely associated with Irving Fisher, suggested that interest rates should move with the rate of change in prices, i.e., the inflation rate or expected inflation rate, rather than the price level itself. Yet when Keynes wrote, data for the prior two centuries showed that the yield on British consols (government securities issued at a fixed rate of interest but with no redemption date) had moved in close correlation with wholesale prices but almost no correlation to the inflation rate."

 

Full Article - A lot to chew on

 

[richmtn]

More Great Charts From Sharelynx

[DrStool]

rich- you can do a window capture by clicking Alt and Print Screen simulatnaeously. Then just paste it into a graphics program, like Paint, and save it as a gif file.

[GregFokker]

Thanks for reeling that one in, Rich. It's a big nut to crack- gonna have to gnaw on it for awhile.

[richmtn]

Thanks Doc.

 

Anyone other than Greg read or understand that article?

[Yoshaviah]

While under the gold standard the gold price would move with interest rates. If the rates went down then the gold price would go up because banks weren't paying enough interest to attract gold into the banks. If the rates went up then the gold price would go down becasue people would deposit their gold in order to make money from the higher interest rates. The banks created the demand (or lack thereof) for gold-backed deposits through interest rates. Today, we are not under a gold standard directly, but the effect is the same because the market is manipulated in an effort to control interest rates. Today the banks control interest rates by controlliing the gold price. The bond market, seeing a low gold price and hence not fearing inflation, will accept a lower rate of interest. The recent FED rate cuts have been the prime mover behind the rise in the POG. Thus, as rates move lower the price of gold rises just as it did under the gold standard. The rise in the gold price is also indicative of the effect of negitive real interest rates. If one wants to preserve buying power in the presence of inflation then gold is the only means even if it doesn't pay interest :grin: