Maybe this guy has indeed made some good predictions and will turn out correct in the inflation/deflation flame wars, but these paragraphs aren’t filling me with a desire to jump on his wagon. He is not saying why things are different now but is just ignoring the history of money entirely.

Mike Stathis:
“What this means is that gold has no inherent value whatsoever. It doesn’t generate a cash flow based on fundamental economics so it doesn’t generate earnings. There’s no way you can produce an income from gold other than if you are a gold dealer and you sell it to people, unlike silver, which has inherent value. Silver is used extensively throughout industry, so it’s an income-producing asset. Gold is not. Gold is kind of like artwork.

One big difference between gold and artwork is that gold is pretty much the same wherever you buy it; it’s considered a commodity. And it trades on global markets. Therefore, unlike artwork, which can command a certain price from one prospective buyer and a different price from another, gold is invariable and trades on a huge market made up of buyers and sellers.

And because gold is the same wherever you buy it, the price reflects what the world wants to pay for it. Because the gold market is global, it’s bought and sold with more efficient or uniform pricing than artwork.

On the other hand, you can get a kid to paint a picture and claim it was painted by an eccentric artist who died last year, take it to an auction in NYC, and it might sell for $100,000.

That same painting, if auctioned off in Europe or China might sell for $500, or maybe even $50,000; no one really knows what it might sell for. It depends a lot on how it’s marketed. It’s also based on individual taste.

Gold pricing is similar in some respects, unless of course people detect fake gold, which I can assure you is all over the globe. Excluding this scenario, because gold is the same wherever you buy it, and because it’s traded on large organized markets around the globe, the price is fixed at any point in time. This is the main difference I see between artwork and gold. Neither has inherent value. They only have perceived value based on supply and demand, but not need or utility. “

Just because the inflationary actions of the Fed haven’t been enough to completely counteract (i.e. hide) the natural decline in housing prices coming off that artificial peak, does not mean such a decline is evidence to refute an argument of inflation.

“So anyway, thanks again and have a happy Thanksgiving. (At least try to resist the GWARish urge to take a chainsaw to the poor bird!)”

Thank you, you too. Don’t worry, GWAR doesn’t use chainsaws on the bird, we have other tools, but I’ll spare you the gory details.

Thanks for the reference. I’ve just finished reading the first half of this paper (the critique of Rothbard’s analysis) and my mind is slightly boggled over the woeful state of Austrian theory. It took until 2008 to recognize that there is no definite relationship between changes in social time preference and changes the rate of interest?

I became aware of Austrian economics in early 2007 and as part of my self-education (since I have had no formal economics/finance training) I worked out (in 2008) many of the mathematical consequences of Rothbard’s ideal” ERE” production structure. Perhaps the most elementary of these consequences is the relationship between the social time preference (θ = C/S) with the pure rate of interest “i” (i.e. where complete production certainty exists):

θ = iT + F/S

Here T is the period of production and F/S is the ratio of the original factor income to gross savings. Given the independence of the terms on the rhs, this expression tells one immediately that Δθ and Δi need not be correlated. (This is one of the reasons I regard social time preference, in its more general form outside the ERE, to be much more useful than the interest rate for theoretical applications.) So regardless of what Rothbard said explicitly, the implications of his model are not at odds with Hulsmann’s analysis and this fact should have been recognized by someone over the past fifty years!

So anyway, thanks again and have a happy Thanksgiving. (At least try to resist the GWARish urge to take a chainsaw to the poor bird!)

http://www.guidohulsmann.com/pdf/Time_Preference_Investment_Expenditure.pdf

Beefcake has put up this link so many times I figured everyone would have read it by now.

http://mises.org/journals/qjae/pdf/qjae1_4_1.pdf

If Hulsmann has said something to this end, can you provide a link please, I’d like to read it.

The deflationista’s/credit contraction crowd forgot to allow some wiggle room in their models for Chinese/global credit growth.

Not just us any more buying up raw materials.

If and when China slows, the deflationists will have their day.

BTW, do any of the Mish followers here know where he gets the $35 Trillion value for total bank credit? Given that the credit level for U.S. commercial banks is $9.2 Trillion (derived from the Fed graph in Dr. Murphy’s article), I would assume that Mish is referring to a global level of bank credit.

http://globaleconomicanalysis.blogspot.com/2010/11/failure-to-consider-constraints-my.html

You’re right that the Fed has purchased a lot of assets, but it hasn’t been able to fill the void left by the destruction of credit. At present there are too many holes in the dam for the Fed to plug with its ink-stained finger in order to allow the level of money to rise. You may find examples of rising prices resulting from fundamental and dollar movements, but inflation is an increase in the money supply, is it not?

I’m a logical person, but I find this rebuttal that Mr. Murphy is providing is extremely weak (if there was even a rebuttal). He wants to point to failed predictions as a means to discredit someone, but what I want is a real argument for inflation. That’s what made the Mises Circle event so disappointing. I want strong, logical arguments about RELEVANT topics regarding money and credit to support the outlook for inflation.

I understand the deflationist argument like what Mish is articulating pretty well. The current supply of money and credit doesn’t necessarily affect the dollar in real time. What Mr. Murphy fails to realize is that a collapse in the dollar doesn’t have to happen in order for commodity prices to rise. The price of the dollar is a relative valuation, and the weakness is a result of our attempts to increase the money supply at a faster rate then other developed nations, namely Europe. However, all central banks are trying to inflate, which will cause commodities like gold to rise. The dollar will do whatever it’s going to do, but commodities will continue to outperform other asset classes, not because of what the Federal Reserve is doing alone, but what all central banks are doing. In fact, gold has it’s best relative performance against other assets when the dollar is stronger resulting from credit destruction, then when the dollar is weak.

From an inflation perspective, can you show that the actual supply of money is increasing? Im not talking about the potential supply of money in the form of reserves. That money may not see the light of day for some time, thus the timing of likely inflation. If you read Mish you’ll find that he does feel that inflation will be a problem down the road, but at present the supply of money is contracting as credit is being destroyed or marked down.

I only follow Peter Schiff more regularly than others and he is saying the same thing. His point is that inflationary factors will eventually dominate the deflationary factors. The composition of the CPI aside, isn’t it remarkable that one of the greatest credit crunches only caused so much price deflation? Much of the bought-up financial ‘assets’ by the Fed are not even on the market, just as an impressive number of foreclosed real estate. The minimal price deflation already is a direct (counterfactual) example that there is already price inflation. As GDP and productivity numbers are not that good to go on, as they are measured in inflated prices, they should be seen relative to other macro aggregates such as employment rate, unemployment rate, and others that signify real wealth.

If Mish states that gold is money, does he mean to claim that because the rise in the price of gold signifies deflation because in gold terms goods and other assets have become cheaper? If so, that seems like a reasonable statement, but it at the same time means that in dollar terms there is real price inflation going on.