BIS Chief Economist, William White, starts a newly-posted working paper contrasting Keynes’ egregious ‘long-run’ quip against Mises’ measured counter.
Indeed, once we set aside certain libertarian and other objections to central banking, per se, this whole piece, from a high priest of the inner sanctum, is very pro-Austrian and is tacitly disparaging of both “orthodox” economics and Greenspan-Bernankism. It is also a tightly reasoned and comprehensive indictment of our current parlous global monetary order.
By way of example, consider the following excerpts:
‘The principal impediment to using monetary policy to resist financial excesses is that it can be seen to conflict with the desire to stabilise inflation at a low positive level. Perhaps the first heretical point to raise is whether this should always be the objective of policy, given the reality of ongoing positive supply side shocks. There was a lively debate about such issues prior to the First World War, and the issue needs to be addressed again. As noted above, resisting a “good deflation” (supply-driven) could over time rather result in fostering conditions that might lead to a “bad deflation” (demand-driven).’
…and, again:-
‘It must also be noted that the prices of many assets, both financial and real, also looked high as of mid-2005 against the benchmark of historical valuations….
‘With respect to [these], idiosyncratic arguments have been presented to justify what is being observed in the light of underlying fundamentals in that particular market. However, a complementary but simpler explanation also suggests itself. All these prices are high because of strong demand for assets induced by very low global policy rates.
‘In effect, existing ample liquidity is being used to purchase “illiquidity”…. In practice, liquidity is being sold in the form of put options by those eager to receive premia inflow in an environment of very low interest rates.
‘However, if this is part of the explanation for higher asset prices, it must also be asked why recent moves to tighten policy in the United States have not had more effect.
‘One explanation is that “measured tightening” lowers rather than eliminates the expected rates of excess return from purchasing such assets. Indeed, it is not inconceivable that well anticipated tightening of this sort might even reduce risk premia and encourage more leverage to maintain expected rates of return.
‘If so – and this is highly speculative – the eventual reversion of valuations to levels closer to historical norms would be sharper, and the interaction with higher debt levels more contractionary.’
{ 12 comments }
To bad Greenspan haven’t expressed himself that way-during the last 39 years.
It looks as though we may be set to repeat Japan’s performance of the 90′s. Debt seems to be high enough that in the next slow down, lower rates from the fed won’t encourage further borrowing. The huge debt overhang could take years to work out. If that’s the case, where should a guy put his money? All asset classes seem to be overvalued, even gold. Should we just hold cash?
Roger M,
Gold is nominally at a 25-year high, but adjusted for inflation, it would need to over $2,000 an ounce to be at an actual 25-year high.
It’s cheap, in other words, and when China starts putting the breaks on buying US government debt, as it inevitably will, the dollar will finally get what it deserves. As will gold. Buy it.
Hey, speaking of which, any suggestions on how a financial newbie might safely buy some reasonably small quantity of gold? Thanks.
Roy,
Contact Burt Blumert — see the lewrockwell.com gold page.
To Roy:
The easiest way for a small investor to buy physical gold is to buy coins. For US Gold Eagles you typically pay about 5% over the spot price of gold.
Keep in mind that I’m not talking about rare old coins (that’s another topic entirely). These are contemporary coins still produced by the US mint. You can buy them in coin & collectible stores, or online through kitco.com.
I’ve also bought Canadian Maple Leaves, South African Krugerands, and Chinese Pandas. As investments they’re equally good, but the premiums vary.
When holding several ounces of real gold coins in your hand, you start to realize why gold has so fascinated people for millenia.
Roy: go to http://www.pecunix.com or goldmoney.com. Buy a few coins (semi-numismatic coins like pre-1933 US currency are a better investment than bullion coins), sure, but keep most of your gold in Pecunix or GoldMoney.
Roger M, if we go down the Japanese road then you’d want to buy long dated bonds or as you say, hold cash and wait for buying opportunities as assets overshoot to the downside as one can argue Japanese property is doing right now.
Roy – on buying gold:
When I visited the US a couple years ago, I spent a morning in New York’s Chinatown( or whatever its called). The most interesting thing I saw there was a multitude of jewellery shops, and the most common thing they sold were 24-carat gold buddahs, all an identical shape, in varying sizes, from fractions of an ounce all the way up to a kilogram or more. Roy you might want to consider that option as an alternative to coins.
I dont know the US regs relating to dealing in gold, but if it’s anything similar to South Africa where dealing in ‘unwrought’ gold bullion is illegal for ordinary unlicenced people, its clear to me that casting the gold into a buddah ( or any other artistic) shape to qualify it as ‘worked’ is a natural human response to an absurd trade constraint – and its equally clear to me that Chinese people living in New York still consider gold as a good store of wealth.
Some years ago ( around the time gold touched $800) , we in SA had an entrepreneurial jeweller who circumvented the trade-in-bullion restriction by casting his own little 24carat gold bars, stamped with the weight ( half, one, two etc ounces), and appended them to little 9 carat gold chains. Then he sold them at a floating price based on the real-time ruling gold price, as shown by Reuters at the time of sale. People flocked to his shops and bought them, some by the hundred. Government tried to shut him down, but the courts upheld his claim that he was selling jewellery, not bullion, and that his pricing policy was entirely up to him. At the time, his gold was cheaper than Krugerrands, then the only legal form of pure, fine-weighted gold consumers were allowed to buy – the nose-out-of-joint state-sanctioned monopolist clearly being the root of the legal challenge.
as an aside, this same entrep. shook up the funeral parlour market some time later by selling cut-price, bargain basement coffins. The howls of outrage from the established undertakers could , Im sure, have been heard by St Peter!
Roger M, if we go down the Japanese road then you’d want to buy long dated bonds or as you say, hold cash and wait for buying opportunities as assets overshoot to the downside as one can argue Japanese property is doing right now.
Read more: The BIS quotes Mises — Mises Economics Blog http://blog.mises.org/4539/the-bis-quotes-mises/#ixzz0ppJEqV48
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