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Money Flow Trading Method along with Risk Management
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- Edited 9:19pm Jan 28, 2024 9:06pm | Edited 9:19pm
- | Commercial User | Joined Dec 2014 | 14,162 Posts
January 28, 2024
Russian “America Bloody Civil War” Parody Joins Real Life Texas “Declaration Of War”
By: Sorcha Faal, and as reported to her Western Subscribers
A beyond concerning new Security Council (SC) report circulating in the Kremlin today first noting President Putin laid flowers at the Frontier Stone Monument on the Nevsky Patch in commemoration of the 80th Anniversary of the liberation of Leningrad from National Socialist German Workers' Party (aka Nazi Party) forces, and where he vowed to the world: “We will do everything – everything to undercut and eradicate Nazism for good”, says this followed Russian media personality and singer Olga Buzova, who is regarded as one of the most successful Russian contemporary entertainers, releasing her parody video based on the former Soviet Union film “Time, Forward!”, wherein she imagined a United States under socialist siege stating: “Today, at a special meeting of the UN Security Council, a decision was made to send an additional peacekkeping task force to the USA...Soviet servicemen will also join the task force...On the territory of the former United States of America, a bloody civil war is continuing...Hiding in Hawaii, the last legitimate US President Donald Trump has, once again, asked the USSR for military assistance to suppress insurgent gangs of marauders...To fulfill this mission, the Soviet Union is sending the 104th Airborne Brigade from its Anchorage base in the Republic of Alaska”—and is a video meant as a parody that was quickly joined by the shocking American article “The U.S. Is A Lawless Society Where The Criminals Get To Go Free But Underwear And Socks Are Locked Up”.
As “insurgent gangs of marauders” turn the United States into a “lawless society”, this report notes, it was revealed today: “A new migrant caravan made up of approximately 1,800 migrants began walking through southern Mexico to make their way north toward the U.S. border, where some have expressed the expectation of crossing illegally and then requesting asylum or protection”—a revelation joined by the beyond all belief shocking article “Joe Biden’s Parole Pipeline Freed 745,000 Foreign Nationals Into U.S. In 2023 — Exceeding 2 Months Of American Births”—and as for the top priority of Supreme Socialist Leader Joe Biden while America is being destroyed, today it was also revealed: “The White House says it is “alarmed” over sexually explicit AI-generated images of pop star Taylor Swift circulating on social media”.
Currently in the United States Senate, this report continues, is a secret bill no one is allowed to see linking aid to Ukraine to American border protection, about which Socialist Leader Biden proclaimed: “If enacted, would be the toughest and fairest set of reforms to secure the border we've ever had...It would give me, as President, a new emergency authority to shut down the border when it becomes overwhelmed...And if given that authority, I would use it the day I sign the bill into law”—top Republican Party leader House Speaker Mike Johnson warned this secret bill is “dead on arrival” if it reaches the United States House of Representatives and factually declared: “President Biden falsely claimed yesterday he needs Congress to pass a new law to allow him to close the southern border, but he knows that is untrue...As I explained to him in a letter late last year, and have specifically reiterated to him on multiple occasions since, he can and must take executive action immediately to reverse the catastrophe he has created”—a factual declaration joined by the world’s richest person Elon Musk truthfully observing: “No laws need to be passed...All that is needed is an executive order to require proof before granting an asylum hearing, that is how it used to be”—and famed American political journalist Michael Shannon honestly assessed: “Joe Biden remains an unrepentant liar...He has no intention of closing the border and even if they did, it’s too late...What is required is closing the border and relentless, mass deportations of illegals regardless of how long they’ve been inside the border breaking the law”.
As of 8 December 2023, this report details, “Operation Lone Star” launched by Texas Governor Greg Abbott amassed $55,427,025 in donations from the American peoples to build a border wall, and this past week, on 24 January 2024, it saw Governor Abbott issuing his declaration of war statement against the socialist Biden Regime proclaiming:
The federal government has broken the compact between the United States and the States.
The Executive Branch of the United States has a constitutional duty to enforce federal laws protecting States, including immigration laws on the books right now. President Biden has refused to enforce those laws and has even violated them. The result is that he has smashed records for illegal immigration.
Despite having been put on notice in a series of letters—one of which I delivered to him by hand—President Biden has ignored Texas’s demand that he perform his constitutional duties.
• President Biden has violated his oath to faithfully execute immigration laws enacted by Congress. Instead of prosecuting immigrants for the federal crime of illegal entry, President Biden has sent his lawyers into federal courts to sue Texas for taking action to secure the border.
• President Biden has instructed his agencies to ignore federal statutes that mandate the detention of illegal immigrants. The effect is to illegally allow their en masse parole into the United States.
• By wasting taxpayer dollars to tear open Texas’s border security infrastructure, President Biden has enticed illegal immigrants away from the 28 legal entry points along this State’s southern border—bridges where nobody drowns—and into the dangerous waters of the Rio Grande.
Under President Biden’s lawless border policies, more than 6 million illegal immigrants have crossed our southern border in just 3 years. That is more than the population of 33 different States in this country. This illegal refusal to protect the States has inflicted unprecedented harm on the People all across the United States.
James Madison, Alexander Hamilton, and the other visionaries who wrote the U.S. Constitution foresaw that States should not be left to the mercy of a lawless president who does nothing to stop external threats like cartels smuggling millions of illegal immigrants across the border. That is why the Framers included both Article IV, § 4, which promises that the federal government “shall protect each [State] against invasion”, and Article I, § 10, Clause 3, which acknowledges “the States’ sovereign interest in protecting their borders”. Arizona v. United States, 567 U.S. 387, 419 (2012) (Scalia, J., dissenting).
The failure of the Biden Administration to fulfill the duties imposed by Article IV, § 4 has triggered Article I, § 10, Clause 3, which reserves to this State the right of self-defense.
For these reasons, I have already declared an invasion under Article I, § 10, Clause 3 to invoke Texas’s constitutional authority to defend and protect itself.
That authority is the supreme law of the land and supersedes any federal statutes to the contrary.
The Texas National Guard, the Texas Department of Public Safety, and other Texas personnel are acting on that authority, as well as state law, to secure the Texas border.
Immediately upon Texas Governor Abbott issuing his declaration of war against the socialist Biden Regime, the report notes, the Republican Governors Association (RGA) representing 27 of the 50 States in America issued its supporting the right to defense proclamation:
President Biden and his Administration have left Americans and our country completely vulnerable to unprecedented illegal immigration pouring across the Southern border. Instead of upholding the rule of law and securing the border, the Biden Administration has attacked and sued Texas for stepping up to protect American citizens from historic levels of illegal immigrants, deadly drugs like fentanyl, and terrorists entering our country.
We stand in solidarity with our fellow Governor, Greg Abbott, and the State of Texas in utilizing every tool and strategy, including razor wire fences, to secure the border.
We do it in part because the Biden Administration is refusing to enforce immigration laws already on the books and is illegally allowing mass parole across America of migrants who entered our country illegally.
The authors of the U.S. Constitution made clear that in times like this, states have a right of self-defense, under Article 4, Section 4 and Article 1, Section 10, Clause 3 of the U.S. Constitution.
Because the Biden Administration has abdicated its constitutional compact duties to the states, Texas has every legal justification to protect the sovereignty of our states and our nation.
Along with Republican States now rushing military troops and State police forces to Texas so it can defend itself against the socialist Biden Regime, this report continues, a massive protest convoy of American peoples calling itself an “Army of God” is also preparing to rush there, and about whom Fox News just revealed: “Large groups of concerned Americans are traveling toward the southern border to demand action from the Biden administration to fix the "wide open" flood of illegal migrants..."Fellow citizens and compatriots ...I call on you in the name of liberty, of patriotism and everything dear to the American character to come to our aid with all dispatch", Pete Chambers, one of the coalition’s commanders, wrote on the "Take Our Border Back" website ”.
With Texas Attorney General Ken Paxton rejecting all demands from the socialist Biden Regime, this report details, today it was stunningly revealed: “In defiance of the Biden Administration’s wishes, senior figures within Customs and Border Protection have stated that there are no plans to have Border Patrol agents remove razor wire barriers erected along sections of the border by the Texas National Guard”—and last evening, President Donald Trump vowed to the under socialist siege peoples of Texas: “When I’m president, instead of trying to send Texas a restraining order, I will send them REINFORCEMENTS...Texas will be given full support and I will deploy all necessary military and law enforcement resources to seal up the final section of border”.
As the United States now stands on the brink of civil war, this report notes, former senior Pentagon security policy analyst Michael Maloof just warned: “This whole immigration issue has become one total mess...Texas Governor Greg Abbott and the governors of 25 other states are very firmly opposed to what the Biden administration is doing...And I would add that it's also suggesting a line in the sand...If you look at the states that are involved, they're mostly right in the middle and approaching toward the east...And it's really a clear division of blue states versus red states in this country today, which is where the political lines have been drawn...And this is all happening leading up to the 2024 elections...And I'm afraid that if the way things are going right now, if Biden wins reelection, there could be a huge explosion in this country”—a warning joined by world-renowned American constitutional historian Daniel Lazare fearfully assessing: “The US political system is cracking along state and federal lines...I have no idea how far this will go...The crisis goes far beyond a local dispute between Texas and the federal government: it threatens the very existence and survival of the United States...
It is nearly 10 months to the presidential elections, yet already civil war is erupting...The 248-year-old American republic is crumbling before our very eyes”.
While watching as an “already civil war is erupting” in the United States, this report concludes, Security Council Deputy Chairman Dmitry Medvedev most factually assessed: “There are known cases in history when some states tried to break away from the Union and form the Confederacy...The end result was the bloody civil war which cost thousands upon thousands of lives...Either way, America can face an unsolvable constitutional crisis, and for long, fall into the abyss of a new, possibly even more destructive civil confrontation...And the Western world, its breath held, will be staring at the American mess in fear...Well, it's their problem, anyway”.
[Note: Some words and/or phrases appearing in quotes in this report are English language approximations of Russian words/phrases having no exact counterpart.]
https://www.whatdoesitmean.com/tcw21.png
January 28, 2024
EU and US all rights reserved. Permission to use this report in its entirety is granted under the condition it is linked to its original source at WhatDoesItMean.Com. Freebase content licensed under CC-BY and GFDL.
[Note: Many governments and their intelligence services actively campaign against the information found in these reports so as not to alarm their citizens about the many catastrophic Earth changes and events to come, a stance that the Sisters of Sorcha Faal strongly disagree with in believing that it is every human being’s right to know the truth. Due to our mission’s conflicts with that of those governments, the responses of their ‘agents’ has been a longstanding misinformation/misdirection campaign designed to discredit us, and others like us, that is exampled in numerous places, including HERE.]
[Note: The WhatDoesItMean.com website was created for and donated to the Sisters of Sorcha Faal in 2003 by a small group of American computer experts led by the late global technology guru Wayne Green (1922-2013) to counter the propaganda being used by the West to promote their illegal 2003 invasion of Iraq.]
[Note: The word Kremlin (fortress inside a city) as used in this report refers to Russian citadels, including in Moscow, having cathedrals wherein female Schema monks (Orthodox nuns) reside, many of whom are devoted to the mission of the Sisters of Sorcha Faal.]
Kari Lake Warns “They’re Going To Have Me Murdered” As “Jellyfish Alien” Terror Grows
Assassination Season Officially Opens In America
Return To Main Page
Russian “America Bloody Civil War” Parody Joins Real Life Texas “Declaration Of War”
By: Sorcha Faal, and as reported to her Western Subscribers
A beyond concerning new Security Council (SC) report circulating in the Kremlin today first noting President Putin laid flowers at the Frontier Stone Monument on the Nevsky Patch in commemoration of the 80th Anniversary of the liberation of Leningrad from National Socialist German Workers' Party (aka Nazi Party) forces, and where he vowed to the world: “We will do everything – everything to undercut and eradicate Nazism for good”, says this followed Russian media personality and singer Olga Buzova, who is regarded as one of the most successful Russian contemporary entertainers, releasing her parody video based on the former Soviet Union film “Time, Forward!”, wherein she imagined a United States under socialist siege stating: “Today, at a special meeting of the UN Security Council, a decision was made to send an additional peacekkeping task force to the USA...Soviet servicemen will also join the task force...On the territory of the former United States of America, a bloody civil war is continuing...Hiding in Hawaii, the last legitimate US President Donald Trump has, once again, asked the USSR for military assistance to suppress insurgent gangs of marauders...To fulfill this mission, the Soviet Union is sending the 104th Airborne Brigade from its Anchorage base in the Republic of Alaska”—and is a video meant as a parody that was quickly joined by the shocking American article “The U.S. Is A Lawless Society Where The Criminals Get To Go Free But Underwear And Socks Are Locked Up”.
As “insurgent gangs of marauders” turn the United States into a “lawless society”, this report notes, it was revealed today: “A new migrant caravan made up of approximately 1,800 migrants began walking through southern Mexico to make their way north toward the U.S. border, where some have expressed the expectation of crossing illegally and then requesting asylum or protection”—a revelation joined by the beyond all belief shocking article “Joe Biden’s Parole Pipeline Freed 745,000 Foreign Nationals Into U.S. In 2023 — Exceeding 2 Months Of American Births”—and as for the top priority of Supreme Socialist Leader Joe Biden while America is being destroyed, today it was also revealed: “The White House says it is “alarmed” over sexually explicit AI-generated images of pop star Taylor Swift circulating on social media”.
Currently in the United States Senate, this report continues, is a secret bill no one is allowed to see linking aid to Ukraine to American border protection, about which Socialist Leader Biden proclaimed: “If enacted, would be the toughest and fairest set of reforms to secure the border we've ever had...It would give me, as President, a new emergency authority to shut down the border when it becomes overwhelmed...And if given that authority, I would use it the day I sign the bill into law”—top Republican Party leader House Speaker Mike Johnson warned this secret bill is “dead on arrival” if it reaches the United States House of Representatives and factually declared: “President Biden falsely claimed yesterday he needs Congress to pass a new law to allow him to close the southern border, but he knows that is untrue...As I explained to him in a letter late last year, and have specifically reiterated to him on multiple occasions since, he can and must take executive action immediately to reverse the catastrophe he has created”—a factual declaration joined by the world’s richest person Elon Musk truthfully observing: “No laws need to be passed...All that is needed is an executive order to require proof before granting an asylum hearing, that is how it used to be”—and famed American political journalist Michael Shannon honestly assessed: “Joe Biden remains an unrepentant liar...He has no intention of closing the border and even if they did, it’s too late...What is required is closing the border and relentless, mass deportations of illegals regardless of how long they’ve been inside the border breaking the law”.
As of 8 December 2023, this report details, “Operation Lone Star” launched by Texas Governor Greg Abbott amassed $55,427,025 in donations from the American peoples to build a border wall, and this past week, on 24 January 2024, it saw Governor Abbott issuing his declaration of war statement against the socialist Biden Regime proclaiming:
The federal government has broken the compact between the United States and the States.
The Executive Branch of the United States has a constitutional duty to enforce federal laws protecting States, including immigration laws on the books right now. President Biden has refused to enforce those laws and has even violated them. The result is that he has smashed records for illegal immigration.
Despite having been put on notice in a series of letters—one of which I delivered to him by hand—President Biden has ignored Texas’s demand that he perform his constitutional duties.
• President Biden has violated his oath to faithfully execute immigration laws enacted by Congress. Instead of prosecuting immigrants for the federal crime of illegal entry, President Biden has sent his lawyers into federal courts to sue Texas for taking action to secure the border.
• President Biden has instructed his agencies to ignore federal statutes that mandate the detention of illegal immigrants. The effect is to illegally allow their en masse parole into the United States.
• By wasting taxpayer dollars to tear open Texas’s border security infrastructure, President Biden has enticed illegal immigrants away from the 28 legal entry points along this State’s southern border—bridges where nobody drowns—and into the dangerous waters of the Rio Grande.
Under President Biden’s lawless border policies, more than 6 million illegal immigrants have crossed our southern border in just 3 years. That is more than the population of 33 different States in this country. This illegal refusal to protect the States has inflicted unprecedented harm on the People all across the United States.
James Madison, Alexander Hamilton, and the other visionaries who wrote the U.S. Constitution foresaw that States should not be left to the mercy of a lawless president who does nothing to stop external threats like cartels smuggling millions of illegal immigrants across the border. That is why the Framers included both Article IV, § 4, which promises that the federal government “shall protect each [State] against invasion”, and Article I, § 10, Clause 3, which acknowledges “the States’ sovereign interest in protecting their borders”. Arizona v. United States, 567 U.S. 387, 419 (2012) (Scalia, J., dissenting).
The failure of the Biden Administration to fulfill the duties imposed by Article IV, § 4 has triggered Article I, § 10, Clause 3, which reserves to this State the right of self-defense.
For these reasons, I have already declared an invasion under Article I, § 10, Clause 3 to invoke Texas’s constitutional authority to defend and protect itself.
That authority is the supreme law of the land and supersedes any federal statutes to the contrary.
The Texas National Guard, the Texas Department of Public Safety, and other Texas personnel are acting on that authority, as well as state law, to secure the Texas border.
Immediately upon Texas Governor Abbott issuing his declaration of war against the socialist Biden Regime, the report notes, the Republican Governors Association (RGA) representing 27 of the 50 States in America issued its supporting the right to defense proclamation:
President Biden and his Administration have left Americans and our country completely vulnerable to unprecedented illegal immigration pouring across the Southern border. Instead of upholding the rule of law and securing the border, the Biden Administration has attacked and sued Texas for stepping up to protect American citizens from historic levels of illegal immigrants, deadly drugs like fentanyl, and terrorists entering our country.
We stand in solidarity with our fellow Governor, Greg Abbott, and the State of Texas in utilizing every tool and strategy, including razor wire fences, to secure the border.
We do it in part because the Biden Administration is refusing to enforce immigration laws already on the books and is illegally allowing mass parole across America of migrants who entered our country illegally.
The authors of the U.S. Constitution made clear that in times like this, states have a right of self-defense, under Article 4, Section 4 and Article 1, Section 10, Clause 3 of the U.S. Constitution.
Because the Biden Administration has abdicated its constitutional compact duties to the states, Texas has every legal justification to protect the sovereignty of our states and our nation.
Along with Republican States now rushing military troops and State police forces to Texas so it can defend itself against the socialist Biden Regime, this report continues, a massive protest convoy of American peoples calling itself an “Army of God” is also preparing to rush there, and about whom Fox News just revealed: “Large groups of concerned Americans are traveling toward the southern border to demand action from the Biden administration to fix the "wide open" flood of illegal migrants..."Fellow citizens and compatriots ...I call on you in the name of liberty, of patriotism and everything dear to the American character to come to our aid with all dispatch", Pete Chambers, one of the coalition’s commanders, wrote on the "Take Our Border Back" website ”.
With Texas Attorney General Ken Paxton rejecting all demands from the socialist Biden Regime, this report details, today it was stunningly revealed: “In defiance of the Biden Administration’s wishes, senior figures within Customs and Border Protection have stated that there are no plans to have Border Patrol agents remove razor wire barriers erected along sections of the border by the Texas National Guard”—and last evening, President Donald Trump vowed to the under socialist siege peoples of Texas: “When I’m president, instead of trying to send Texas a restraining order, I will send them REINFORCEMENTS...Texas will be given full support and I will deploy all necessary military and law enforcement resources to seal up the final section of border”.
As the United States now stands on the brink of civil war, this report notes, former senior Pentagon security policy analyst Michael Maloof just warned: “This whole immigration issue has become one total mess...Texas Governor Greg Abbott and the governors of 25 other states are very firmly opposed to what the Biden administration is doing...And I would add that it's also suggesting a line in the sand...If you look at the states that are involved, they're mostly right in the middle and approaching toward the east...And it's really a clear division of blue states versus red states in this country today, which is where the political lines have been drawn...And this is all happening leading up to the 2024 elections...And I'm afraid that if the way things are going right now, if Biden wins reelection, there could be a huge explosion in this country”—a warning joined by world-renowned American constitutional historian Daniel Lazare fearfully assessing: “The US political system is cracking along state and federal lines...I have no idea how far this will go...The crisis goes far beyond a local dispute between Texas and the federal government: it threatens the very existence and survival of the United States...
It is nearly 10 months to the presidential elections, yet already civil war is erupting...The 248-year-old American republic is crumbling before our very eyes”.
While watching as an “already civil war is erupting” in the United States, this report concludes, Security Council Deputy Chairman Dmitry Medvedev most factually assessed: “There are known cases in history when some states tried to break away from the Union and form the Confederacy...The end result was the bloody civil war which cost thousands upon thousands of lives...Either way, America can face an unsolvable constitutional crisis, and for long, fall into the abyss of a new, possibly even more destructive civil confrontation...And the Western world, its breath held, will be staring at the American mess in fear...Well, it's their problem, anyway”.
[Note: Some words and/or phrases appearing in quotes in this report are English language approximations of Russian words/phrases having no exact counterpart.]
https://www.whatdoesitmean.com/tcw21.png
January 28, 2024
EU and US all rights reserved. Permission to use this report in its entirety is granted under the condition it is linked to its original source at WhatDoesItMean.Com. Freebase content licensed under CC-BY and GFDL.[Note: Many governments and their intelligence services actively campaign against the information found in these reports so as not to alarm their citizens about the many catastrophic Earth changes and events to come, a stance that the Sisters of Sorcha Faal strongly disagree with in believing that it is every human being’s right to know the truth. Due to our mission’s conflicts with that of those governments, the responses of their ‘agents’ has been a longstanding misinformation/misdirection campaign designed to discredit us, and others like us, that is exampled in numerous places, including HERE.]
[Note: The WhatDoesItMean.com website was created for and donated to the Sisters of Sorcha Faal in 2003 by a small group of American computer experts led by the late global technology guru Wayne Green (1922-2013) to counter the propaganda being used by the West to promote their illegal 2003 invasion of Iraq.]
[Note: The word Kremlin (fortress inside a city) as used in this report refers to Russian citadels, including in Moscow, having cathedrals wherein female Schema monks (Orthodox nuns) reside, many of whom are devoted to the mission of the Sisters of Sorcha Faal.]
Kari Lake Warns “They’re Going To Have Me Murdered” As “Jellyfish Alien” Terror Grows
Assassination Season Officially Opens In America
Return To Main Page
5-Minute Chart of Dow 30 - Notice how we continually see the same patterns. https://finviz.com/futures_charts.ashx?t=YM&p=i5 When you sign up for the 90-day course, I will explain fundamentally why the patterns repeat. It is not a coincidence. It all relates to my MONEY FLOW Strategy. Aviel Forex Learning Edge Corporation WWW.AVIELFOREXLEARNINGEDGE.COM {image}
- #12,170
- Edited 6:07am Feb 1, 2024 5:47am | Edited 6:07am
- | Commercial User | Joined Dec 2014 | 14,162 Posts
- #12,173
- Edited 8:24am Feb 2, 2024 8:14am | Edited 8:24am
- | Commercial User | Joined Dec 2014 | 14,162 Posts
https://www.goldmoney.com/research/g...5SzSdC8M9EvKgs
Gibson's Paradox
Aug 2, 2015·Alasdair Macleod
Gibson's paradox has defeated all the mainstream economists who have tried to resolve it, including Irving Fisher, John Maynard Keynes and Milton Friedman.
As Keynes noted, the paradox is that the price level and the nominal interest rate were positively correlated in the two centuries before he examined it in 1930.
Monetary theory posits the correlation should be between changes in the level of price inflation and interest rates. Empirical evidence shows there is no such correlation. The response from the Neo-Keynesian and monetarist schools has been to ignore Gibson's paradox instead of resolving it, so much so that few economics professors are aware of its existence today.
This paper explains the paradox in sound theoretical terms, and casts doubt on the assumptions behind the quantity theory of money, with important implications for monetary policy.
INTRODUCTION
Thomas Tooke in 1844 is generally thought to be the first to observe that the price level and nominal interest rates were positively correlated. It was Keynes who christened it Gibson's paradox after Alfred Gibson, a British economist who wrote about the correlation in 1923 in an article for Banker's Magazine. Keynes called it a paradox in 1930, because there was no satisfactory explanation for it. He wrote that "the price level and the nominal interest rate were positively correlated over long periods of economic history".1 Irving Fisher similarly had difficulties with it: "no problem in economics has been more hotly debated,"2 and even Milton Friedman was defeated: "The Gibson paradox remains an empirical phenomenon without a theoretical explanation".3 Others also attempted to resolve it, from Knut Wicksel4 to Barsky & Summers.5
Monetary theory would suggest the correlation should have been between changes in the level of price inflation and interest rates. This is the basis upon which central banks determine monetary policy, and now that the gold standard no longer exists, it is probably assumed by those that have looked at the paradox that it is no longer relevant. This appears to be a reasonable explanation for today's lack of interest in the subject, with many professional economists unaware of it.
Those economists who have examined the paradox generally agree that it existed. This paper will not go over their old ground other than to make a few pertinent observations:
• Data over the period covered, other than prices for British Government Consols cannot be deemed wholly reliable for two
reasons. Firstly, price data from 1730 to 1930, the period observed, cannot be rigorous; and secondly any observations of price levels by their nature must be selective and subjective as to their composition.
• Attempts to construct a theory to explain the paradox after the Second World War differ from earlier attempts, because the more recent academic consensus dismisses Say's Law, otherwise known as the law of the markets. Barsky & Summers in particular resort to mathematical explanations as part of their paper, thereby treating it as a problem of natural science and not a social science.
• The economists who have tackled the problem were unaware of the Austrian School's price and time-preference theories, or have dismissed them in favour of Neo-Keynesian and monetary economics. The silence of the Austrian School on the subject is an apparent anomaly.
The Author shows that the theoretical reasoning of the Austrian School leads to a satisfactory resolution of the paradox without having recourse to questionable statistics or mathematical method.
THE PARADOX
Gibson's paradox is based on the long-run empirical evidence between 1730 and 1930, a period of 200 years, when it was observed by Arthur Gibson that changes in the level of the yield on British Government Consols 2 ½% Stock positively correlated with the wholesale price level. No satisfactory theoretical explanation for this correlation has yet been published. It is shown in Chart 1 (Note: annual price data estimates from the Office for National Statistics are only available from 1750).
https://gm-media-library.s3.eu-west-...3a92f340f3.png
The quantity theory of money suggests that instead there should be a strong correlation between changes in interest rates and the rate of price inflation. However there is no discernible correlation between the two. Contrast Chart 2 below with Chart 1 above.
https://gm-media-library.s3.eu-west-...da048d1683.png
If Gibson's paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks' success in substituting pure fiat currency in place of sound money. If the paradox is solely a consequence of metallic, or sound money, it might pose no threat to the modern currency system; otherwise it may have profound implications.
Modern macroeconomists appear ill-equipped to tackle this issue. The paradox is essentially a market phenomenon and macroeconomics is at odds with markets. An economist who favours macroeconomic theory will acknowledge a primary function of the state is to intervene in markets for a better outcome than a policy of laissez-faire; and that the needs and wants, the purposeful actions of ordinary people, collectively through markets free of exogenous factors, can be improved by government intervention. Yet it is ordinary people and their businesses that were behind the relationship between the interest rate on gold or gold substitutes and wholesale prices during the period the paradox was observed. For this reason an approach to the problem that is consistent with Say's law and denies the validity of conventional neo-classical economic theory is more likely to resolve the paradox.
WHY SAY'S LAW IS IMPORTANT
Say's law describes the fundamental framework within which markets work. By implication it holds that each one of us produces a good or service so that we can buy the goods and services we want: 6 we produce to consume so we are both producers and consumers. Put another way, we cannot acquire the wide range of things we need or want without providing our labour and specialist skills for profit, the profit we require to sustain ourselves. Furthermore, we may choose to defer some of this consumption for future use when it is surplus to our immediate needs. Deferred consumption is saving, the accumulation of wealth, which is either redeployed by the individual to maximise his own productive capacity, or made available to other individuals to enhance their skills for a return. The medium that facilitates all these activities is money, which effectively represents stored labour. It stands to reason that the money used has to be acceptable to all parties.
The primary purpose of money as a transaction medium is to enable all goods and services to be priced, thereby removing the inefficiencies of bartering. Money enables a buyer to compare the cost and benefits of one item against another, and for producers to compete and provide what consumers most want. The forum for this competition is the market, a term for an intangible entity, which facilitates the exchange of goods and services between producers and consumers. Consumers decide how they wish to allocate the fruits of their labour, and it is up to producers to anticipate and respond to these decisions. If someone is not productive and has no savings in order to consume and survive, he or she will require a subsidy, such as welfare or charity, provided from the surplus of other producers. Despite the flexibility money provides these human actions, they cannot be separated.
Therefore everyone is both a producer and consumer, or if unemployed, indirectly so. And it is the individual decision of the consumer what proportion of his production profit to put aside, or save for the future. Say's law describes economic reality, and was generally recognised as the fundamental law of economics until about 1930. But it was an inconvenient truth for some thinkers in the late nineteenth century, most notably for Karl Marx, who advocated state ownership of the means of production, and the national socialists of the early twentieth century who advocated state control of production through regulation. Both socialism and fascism were attempts by the state to subvert the free market process that allowed producers to have the freedom to respond to consumer demands, so both creeds contravened Say's law. Finally, Keynes began in the 1930s to work up a proposition to separate production from consumption and to dismantle the relationship between current and deferred consumption, which culminated in his General Theory, published in 1936.6
Keynes's influence on modern economics is fundamental to today's macroeconomic theories and has led to a widespread academic denial of Say's law. Modern academics, including Keynes himself, were therefore unsympathetic with the theoretical framework required to address the paradox, if only on the basis that it was commonly accepted over the period being considered. It is also an anomaly that the subject seems to have escaped the attention of London-based economists of the Austrian School, such as Robbins and Hayek for whom Say's law remained a fundamental basis of economic theory.
THE FINANCIAL AND ECONOMIC BACKGROUND TO 1730-1930
Gibson's paradox was recorded in Britain, so we must first examine the social and economic conditions that pertained in order to understand the circumstances behind the paradox, and to eliminate the possibility it was the result of circumstances rather than evidence of sound theory yet to be explained.
The increase in the above-ground stock of gold, which was the foundation of money and all money substitutes for much of the time, was a potential factor over the period observed. Uses for gold included jewellery and other adornments as well as money mostly in the form of coin, so it is not possible to establish accurately the money quantity. The observation was of British prices and bond yields, so it is the quantity of gold in circulation as money in Britain which matters, though there is the secondary consideration of gold in circulation in the hands of Britain's trading partners. During the whole period with the exception of the 8 disruption caused by the Napoleonic wars, the quantity of gold was regulated between Britain and her trading partners solely by the demands of trade. Given the low level of peacetime intervention by governments in free markets at that time, differences in prices between countries were arbitraged through gold movements. We can therefore reasonably take the global quantity of aboveground gold stocks as indicative of the quantity of money in circulation regulated only by the market's requirements; though bank credit or the over-issue of unbacked money became an increasing cyclical factor following the Bank Charter Act of 1844.
Prior to the Napoleonic Wars, Britain began to build herself into the most powerful trading economy in history, aided by her overseas possessions and influence, together with the declining influence of Spain after the War of the Spanish Succession. The development of trade with India in the eighteenth century will have increased British demand for gold. The wars against France following the French Revolution were costly both socially, involving nearly half a million men in the army and navy, and financially leading to a drain on gold reserves. Prices rose, driven by the increase in unbacked money substitutes issued by the country banks, and by the diversion of financial resources to support the war effort. This led to the suspension of specie payments on demand against bank notes in 1797. By that time the public had become used to accepting bank notes as a valid substitute for gold, so it continued to accept them in lieu of specie.
Following the Napoleonic wars, the economy had to adjust to peacetime. The Bullion Committee, which had been formed in 1810, recommended a resumption of specie payments to address the problem of rising prices, a recommendation rejected by the government. It was not until 1819, when the war had been over for four years that a second committee under the chairmanship of Robert Peel again recommended a return to specie payments, and from 1821 onwards a gradual resumption of cash payments for banknotes resumed.
The over-issue of notes by the banks during the Napoleonic wars led to the failure of eighty country banks in 1825. This was followed by two Acts of Parliament: in 1826 restricting the Bank of England's monopoly to a radius sixty-five miles from London but permitting it to compete with branches in the provincial towns; and in 1833 withdrawing the Bank of England's monopoly altogether. Banks were then free as a consequence to expand from single-office operations into branch networks through a process of expansion and mergers. The foundation of today's British banks dates from this time.
During this period the debate about the future of money and banking intensified, with the banking school arguing that banks should be free to issue notes as they saw fit, so long as they were prepared to meet all demands for encashment into specie. The currency school argued instead for bank note issues to be tied strictly to specie held in reserves. The controversy between these two schools ended with the Bank Charter Act of 1844, which required the Bank of England to back its note issue with gold, with the exception of £14,000,000 of unbacked notes already in circulation. The intention was for Bank of England notes to gradually replace those issued by other banks in England and Wales (Scottish banks still issue their own notes to this day).
Thus it was that the Bank Charter Act of 1844 sided with the currency school, so far as the note issue was concerned; but by neglecting the issuance of credit, modern fractional reserve banking was born.
It can be seen that Gibson's paradox had to survive substantial variations of economic and monetary conditions likely to disrupt any correlation between the level of wholesale prices and interest rates. If there was a common factor over the two centuries, it was that the domestic UK economy expanded rapidly, facilitated initially by a developing network of canals, which in addition to river and sea navigation enabled the transport of goods throughout the country for the first time. As the industrial revolution progressed, the new science of thermodynamics led to the development of steam power, fuelled by coal which was found and mined in abundance. The mechanisation of factories and mills together with the subsequent development of railways rapidly increased both productivity and the speed of transport and communications. Her position as an important global power gave Britain access to raw materials and overseas markets to fuel economic and technological progress. Britain was so successful that before the First World War eighty per cent of all shipping afloat at that time had been built in Britain. Finally, in the post-war decade to 1930 Britain underwent massive social and political changes, which were generally destructive to the accumulated wealth of the previous century.
GOLD SUPPLY
Without an increase in the quantities of gold available the expansion of economic activity brought about by the industrial revolution would have been expected to lead to a trend of falling prices. As it was, new mines were discovered, notably in California, the Klondike, South and West Africa, and Australia. By 1730 the estimated aboveground stocks accumulated through history were about 2,400 tonnes, and by 1930 they had increased to 33,000 tonnes.7 Britain's population increased from roughly seven million to forty-five million. In other words, the quantity of gold available for money increased at roughly double the rate of the British population over the two centuries.
Other things being equal, the net monetary effect from the increase in the quantity of above-ground gold stocks can be expected to reduce its purchasing power relative to goods; but it is an historical fact that the rapid industrialisation over the period raised the standard of living and life expectancy for the average person considerably, thereby offsetting the inflationary price effects of increased above-ground stocks, so much so that prices appear to have fallen by 20% between 1820 and 1900 according to the ONS figures used in Chart 1.
THE QUANTITY THEORY OF MONEY
The quantity theory as it is generally understood today dates back to David Ricardo, who ignored the transient effects of changes in the 11 quantity of money on prices in favour of a long-run equilibrium outcome. In 1809 Ricardo took the position that the reason for the increase in prices at that time was due to the Bank of England's over-issue of notes. His interest in this respect glossed over the short-run distortions identified by Cantillon and Hume. In the Ricardian version an increase in the quantity of money would simply result in a corresponding rise in prices.
While this relationship is intuitive, it makes the mistake of dividing money from commodities and putting it into a separate category. An alternative view, consistent with the theories of the Austrian School, is to regard money as a commodity whose special purpose is to act as a fungible medium of exchange, retaining value between exchanges. This being the case, it must be questioned whether or not it is right to put money on one side of an equation and the price level on the other.
This is not to deny that a change in the quantity of money for a given quantity of goods affects prices. That it is likely to do so is consistent with the relationship between the relative quantities of any exchangeable commodities. Furthermore, there is an issue of preferences changing between the relative ownership of one commodity compared with another; in this case between an indexed basket of goods and money. Changes in the general level of cash liquidity can have a disproportionate effect on prices, irrespective of changes in the quantity of money in issue at the time.
By ignoring these considerations it is possible to conclude that changes in the quantity of money in circulation are sufficient to control the price level. It is this assumption that Gibson's paradox challenges. To modern macroeconomists the price of money is its rate of interest, though to followers of the Austrian school, this is a gross error. To them, the price of money is not the rate of interest, but the reciprocal of the price of a good bought or sold with it. Furthermore, under this logic money has several prices for each good or service, which will differ between different buyers and sellers depending on all the circumstances specific to a transaction. This is consistent with the Austrian school's observation that prices are 12 entirely subjective and they cannot be determined by formula.
Macroeconomics does not recognise this approach, and averages prices to arrive at an indexed price level. Austrian school economists argue that mathematical methods are wholly inappropriate applied to the real world. Apples cannot be averaged with gin, nor can gin be averaged even with another brand of gin. Averaging the money-values of different products cannot escape this reality.
The rate of interest on money is its time-preference; and again, depending on what the money is intended to be exchanged for its time-preference must match inversely that of the individual good. In other words, by deferring the delivery of a good and paying for it up-front it should be possible to acquire it at a discount. There is the possession of the money foregone, the uncertainty of the contract being fulfilled and the scarcity of the good, which all combine into a time-preference for a particular deferred transaction.
The quantity theory of money ignores this temporal element in the exchange of money for goods. In doing so, it fails to account for the fact that in free markets demand for money, reflected in its time-preference, must correlate with demand for goods.
The quantity theory, by putting money on one side of an equation and goods on another suggests the relationship is otherwise. This gives us an insight into why the quantity theory of money is flawed, and when we explore the Gibsonian relationship between interest rates and the price level it will become obvious why interest rates do not correlate with the rate of price inflation.
THE SOLUTION TO GIBSON'S PARADOX
In the discussion covering the flaws in the quantity theory of money in the previous section clues were given as to how the paradox might be resolved. The starting point is to recognise that money is simply a commodity, albeit with a special function, to act as the temporary store of labour between production and consumption.
We can see that including money, commodities necessary for human progress were in demand during a period of unprecedented economic expansion over the two centuries between 1730 and 1930. In some cases, such as in exchange for harvested grains, the price of gold would have varied from season to season, often wildly. But with all the individual goods, there will have been a match with their time-preferences between manufactured goods and gold and gold substitutes. Therefore, the interest rate on money offered by banks is the other side of the time-preferences of the goods produced by their borrowers, who were predominantly manufacturers and merchants seeking trade finance.
The reason interest rates are set by the demands for money by manufacturers is they have to expend capital in order to produce. Capital becomes one of two essential elements of the price of a future good, the other essential being profit. The capital value of an asset used in production is the sum of the value of output it generates discounted to its present value. If prices of goods are rising, the producer can increase his time-preference in the expectation of higher end-prices for his production. Alternatively, if prices are not rising, or even falling he is limited in his time-preference.
This explains why when prices generally rose, bond yields, as proxy for term interest rates paid by borrowers, also rose. Equally, when prices fell, a producer was less able to bid up his time preferences, so term interest rates fell. In other words, before central banks took upon themselves to control interest rates, interest rates simply correlated to demand for capital from producers.
This analysis of the relationship between prices is wholly in accordance with Carl Menger's insight, that a price only exists for commodities and goods for which supply is limited to less than potential demand.8
POST-1930
After 1930 the paradox was still observed until the 1970s, when the relationship appeared to break down.
https://gm-media-library.s3.eu-west-...febdab1363.png
In the 1970s price inflation according to the ONS accelerated from 5.4% in 1969, to 17.1% in 1974. During that time the Bank of England only increased interest rates under pressure from the markets. Interest rate policy fed a growing preference for hoarding goods and reducing personal cash balances. In this case, the correlation between bond yields and the price level reflected a shift in public confidence in the future purchasing power of the currency, which drove the time-preferences in the market, instead of widespread demand for capital investment.
Bond yields topped out in autumn 1974 before declining; but interest rates finally peaked in 1979/80. This is not fully reflected in the bond yield shown in Chart 4, because the yield curve was sharply negative at that time.
Since that tumultuous decade correlation ceased, and the Bank of England appears to have gained control over interest rates from markets.
It is hardly surprising that when central banks implement monetary policies to ensure that the price level never falls, the normal relationship between the price level and interest rates is interrupted. The relationship between savers and investing producers, which is the basis of the Gibson observation, becomes impaired.
CONCLUSION
The following question was raised earlier in this paper:
If Gibson's paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks' success in substituting pure fiat currency in place of sound money. If the Paradox is solely a consequence of metallic or sound money it might pose no threat to the modern currency system; otherwise it may have profound implications.
It is clear that the difference between markets historically and those of today is that interest rates were set by the demand for savings to invest in production, while today they are set by monetary policy. Monetary policy is not consistent with the basic function of interest rates, which is to reflect a market rate between savers and borrowers to balance supply and demand. Instead, monetarists believe otherwise, that interest rates can be used to regulate the quantity of money.
Gibson's paradox is not dependent on metallic or sound money so much as it is dependent on free markets distributing savings in accordance with demand from borrowers investing in their businesses. We must therefore conclude that monetary policies intended to suppress this effect do have profound implications.
Keynes in his General Theory in 1936 wrote the following in his concluding notes:
"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."9
The long, slow euthanasia of Keynes's rentier class is what has changed. Businesses obtain the funds for investment from other sources directed by the financial system. Savers are channelled increasingly into stock markets, where they participate in businesses as co-owners, instead of lending to them indirectly through the banking system. The banks provide working capital, mainly through the expansion of bank credit, at rates primarily determined not by supply and demand for savings, but set by central banks.
Central banks' insistence on monetary solutions to economic problems have not only buried the Say's law relationship between savers and investing entrepreneurs, they have turned the principal objective of entrepreneurs from patient wealth creation through the accumulation of profits into ephemeral wealth creation through the accumulation of debt. They have been caught up in a credit cycle created by central banks and are no longer borrowing genuine savings from savers who expect to be repaid. If Gibson's paradox had been satisfactorily explained by Tooke or Gibson, the assumptions behind the quantity theory of money and its derivatives would have been thrown into doubt before they became central to monetary policy.
This is a dramatic claim perhaps, but it might have demolished the suppositions behind the quantity theory of money, which became Fisher's equation of exchange, and the brand of monetarism followed by the Chicago school under Milton Friedman. Misleading ideas, such as velocity of circulation in the equation of exchange would have not been taken as meaningful economic indicators. As it is Gibson's paradox is unknown to the majority of economists today, who assume the quantity theory of money is unchallengeable.
So, to put the explanation of Gibson's paradox at its simplest,
If the prices of goods are expected to rise, then their time preferences are bound to increase, and if they are expected to fall, their time preferences are bound to fall. That is why interest rates correlate with the price level.
Click here to view the entire Whitepaper as a PDF...
1 J M KEYNES, A TREATISE ON MONEY, VOL.2 P.1981930
2 IRVING FISHER, THE THEORY OF INTEREST, 1930.
3 FRIEDMAN AND SCHWARTZ, FROM GIBSON TO FISHER, EXPLORATIONS IN ECONOMIC RESEARCH NBER VOL. 3,2 (SPRING)
4 KNUT WICKSEL, INTEREST AND PRICES, 1936, TRANSLATED FROM THE GERMAN, GELDZINS UND GUTERPREISER, 1898.
5 NBER WORKING PAPER SERIES NO. 1680 GIBSON'S PARADOX AND THE GOLD STANDARD, 1985.
6 J M KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, 1936.
7 JAMES TURK, THE ABOVEGROUND GOLD STOCK: ITS IMPORTANCE AND ITS SIZE SEPT 2012 HTTPS://WWW.GOLDMONEY.COM/IMAGES/MED...DGOLDSTOCK.PDF (ACCESSED JULY 2015)
8 CARL MENGER: GRUNDSÄTZE DER VOLKSWIRTSCHAFTSLEHRE (PRINCIPLES OF ECONOMICS)1871.
9 JM KEYNES: THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY PP 376 OF THE 1936 EDITION.
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Gibson's Paradox
Aug 2, 2015·Alasdair Macleod
Gibson's paradox has defeated all the mainstream economists who have tried to resolve it, including Irving Fisher, John Maynard Keynes and Milton Friedman.
As Keynes noted, the paradox is that the price level and the nominal interest rate were positively correlated in the two centuries before he examined it in 1930.
Monetary theory posits the correlation should be between changes in the level of price inflation and interest rates. Empirical evidence shows there is no such correlation. The response from the Neo-Keynesian and monetarist schools has been to ignore Gibson's paradox instead of resolving it, so much so that few economics professors are aware of its existence today.
This paper explains the paradox in sound theoretical terms, and casts doubt on the assumptions behind the quantity theory of money, with important implications for monetary policy.
INTRODUCTION
Thomas Tooke in 1844 is generally thought to be the first to observe that the price level and nominal interest rates were positively correlated. It was Keynes who christened it Gibson's paradox after Alfred Gibson, a British economist who wrote about the correlation in 1923 in an article for Banker's Magazine. Keynes called it a paradox in 1930, because there was no satisfactory explanation for it. He wrote that "the price level and the nominal interest rate were positively correlated over long periods of economic history".1 Irving Fisher similarly had difficulties with it: "no problem in economics has been more hotly debated,"2 and even Milton Friedman was defeated: "The Gibson paradox remains an empirical phenomenon without a theoretical explanation".3 Others also attempted to resolve it, from Knut Wicksel4 to Barsky & Summers.5
Monetary theory would suggest the correlation should have been between changes in the level of price inflation and interest rates. This is the basis upon which central banks determine monetary policy, and now that the gold standard no longer exists, it is probably assumed by those that have looked at the paradox that it is no longer relevant. This appears to be a reasonable explanation for today's lack of interest in the subject, with many professional economists unaware of it.
Those economists who have examined the paradox generally agree that it existed. This paper will not go over their old ground other than to make a few pertinent observations:
• Data over the period covered, other than prices for British Government Consols cannot be deemed wholly reliable for two
reasons. Firstly, price data from 1730 to 1930, the period observed, cannot be rigorous; and secondly any observations of price levels by their nature must be selective and subjective as to their composition.
• Attempts to construct a theory to explain the paradox after the Second World War differ from earlier attempts, because the more recent academic consensus dismisses Say's Law, otherwise known as the law of the markets. Barsky & Summers in particular resort to mathematical explanations as part of their paper, thereby treating it as a problem of natural science and not a social science.
• The economists who have tackled the problem were unaware of the Austrian School's price and time-preference theories, or have dismissed them in favour of Neo-Keynesian and monetary economics. The silence of the Austrian School on the subject is an apparent anomaly.
The Author shows that the theoretical reasoning of the Austrian School leads to a satisfactory resolution of the paradox without having recourse to questionable statistics or mathematical method.
THE PARADOX
Gibson's paradox is based on the long-run empirical evidence between 1730 and 1930, a period of 200 years, when it was observed by Arthur Gibson that changes in the level of the yield on British Government Consols 2 ½% Stock positively correlated with the wholesale price level. No satisfactory theoretical explanation for this correlation has yet been published. It is shown in Chart 1 (Note: annual price data estimates from the Office for National Statistics are only available from 1750).
https://gm-media-library.s3.eu-west-...3a92f340f3.png
The quantity theory of money suggests that instead there should be a strong correlation between changes in interest rates and the rate of price inflation. However there is no discernible correlation between the two. Contrast Chart 2 below with Chart 1 above.
https://gm-media-library.s3.eu-west-...da048d1683.png
If Gibson's paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks' success in substituting pure fiat currency in place of sound money. If the paradox is solely a consequence of metallic, or sound money, it might pose no threat to the modern currency system; otherwise it may have profound implications.
Modern macroeconomists appear ill-equipped to tackle this issue. The paradox is essentially a market phenomenon and macroeconomics is at odds with markets. An economist who favours macroeconomic theory will acknowledge a primary function of the state is to intervene in markets for a better outcome than a policy of laissez-faire; and that the needs and wants, the purposeful actions of ordinary people, collectively through markets free of exogenous factors, can be improved by government intervention. Yet it is ordinary people and their businesses that were behind the relationship between the interest rate on gold or gold substitutes and wholesale prices during the period the paradox was observed. For this reason an approach to the problem that is consistent with Say's law and denies the validity of conventional neo-classical economic theory is more likely to resolve the paradox.
WHY SAY'S LAW IS IMPORTANT
Say's law describes the fundamental framework within which markets work. By implication it holds that each one of us produces a good or service so that we can buy the goods and services we want: 6 we produce to consume so we are both producers and consumers. Put another way, we cannot acquire the wide range of things we need or want without providing our labour and specialist skills for profit, the profit we require to sustain ourselves. Furthermore, we may choose to defer some of this consumption for future use when it is surplus to our immediate needs. Deferred consumption is saving, the accumulation of wealth, which is either redeployed by the individual to maximise his own productive capacity, or made available to other individuals to enhance their skills for a return. The medium that facilitates all these activities is money, which effectively represents stored labour. It stands to reason that the money used has to be acceptable to all parties.
The primary purpose of money as a transaction medium is to enable all goods and services to be priced, thereby removing the inefficiencies of bartering. Money enables a buyer to compare the cost and benefits of one item against another, and for producers to compete and provide what consumers most want. The forum for this competition is the market, a term for an intangible entity, which facilitates the exchange of goods and services between producers and consumers. Consumers decide how they wish to allocate the fruits of their labour, and it is up to producers to anticipate and respond to these decisions. If someone is not productive and has no savings in order to consume and survive, he or she will require a subsidy, such as welfare or charity, provided from the surplus of other producers. Despite the flexibility money provides these human actions, they cannot be separated.
Therefore everyone is both a producer and consumer, or if unemployed, indirectly so. And it is the individual decision of the consumer what proportion of his production profit to put aside, or save for the future. Say's law describes economic reality, and was generally recognised as the fundamental law of economics until about 1930. But it was an inconvenient truth for some thinkers in the late nineteenth century, most notably for Karl Marx, who advocated state ownership of the means of production, and the national socialists of the early twentieth century who advocated state control of production through regulation. Both socialism and fascism were attempts by the state to subvert the free market process that allowed producers to have the freedom to respond to consumer demands, so both creeds contravened Say's law. Finally, Keynes began in the 1930s to work up a proposition to separate production from consumption and to dismantle the relationship between current and deferred consumption, which culminated in his General Theory, published in 1936.6
Keynes's influence on modern economics is fundamental to today's macroeconomic theories and has led to a widespread academic denial of Say's law. Modern academics, including Keynes himself, were therefore unsympathetic with the theoretical framework required to address the paradox, if only on the basis that it was commonly accepted over the period being considered. It is also an anomaly that the subject seems to have escaped the attention of London-based economists of the Austrian School, such as Robbins and Hayek for whom Say's law remained a fundamental basis of economic theory.
THE FINANCIAL AND ECONOMIC BACKGROUND TO 1730-1930
Gibson's paradox was recorded in Britain, so we must first examine the social and economic conditions that pertained in order to understand the circumstances behind the paradox, and to eliminate the possibility it was the result of circumstances rather than evidence of sound theory yet to be explained.
The increase in the above-ground stock of gold, which was the foundation of money and all money substitutes for much of the time, was a potential factor over the period observed. Uses for gold included jewellery and other adornments as well as money mostly in the form of coin, so it is not possible to establish accurately the money quantity. The observation was of British prices and bond yields, so it is the quantity of gold in circulation as money in Britain which matters, though there is the secondary consideration of gold in circulation in the hands of Britain's trading partners. During the whole period with the exception of the 8 disruption caused by the Napoleonic wars, the quantity of gold was regulated between Britain and her trading partners solely by the demands of trade. Given the low level of peacetime intervention by governments in free markets at that time, differences in prices between countries were arbitraged through gold movements. We can therefore reasonably take the global quantity of aboveground gold stocks as indicative of the quantity of money in circulation regulated only by the market's requirements; though bank credit or the over-issue of unbacked money became an increasing cyclical factor following the Bank Charter Act of 1844.
Prior to the Napoleonic Wars, Britain began to build herself into the most powerful trading economy in history, aided by her overseas possessions and influence, together with the declining influence of Spain after the War of the Spanish Succession. The development of trade with India in the eighteenth century will have increased British demand for gold. The wars against France following the French Revolution were costly both socially, involving nearly half a million men in the army and navy, and financially leading to a drain on gold reserves. Prices rose, driven by the increase in unbacked money substitutes issued by the country banks, and by the diversion of financial resources to support the war effort. This led to the suspension of specie payments on demand against bank notes in 1797. By that time the public had become used to accepting bank notes as a valid substitute for gold, so it continued to accept them in lieu of specie.
Following the Napoleonic wars, the economy had to adjust to peacetime. The Bullion Committee, which had been formed in 1810, recommended a resumption of specie payments to address the problem of rising prices, a recommendation rejected by the government. It was not until 1819, when the war had been over for four years that a second committee under the chairmanship of Robert Peel again recommended a return to specie payments, and from 1821 onwards a gradual resumption of cash payments for banknotes resumed.
The over-issue of notes by the banks during the Napoleonic wars led to the failure of eighty country banks in 1825. This was followed by two Acts of Parliament: in 1826 restricting the Bank of England's monopoly to a radius sixty-five miles from London but permitting it to compete with branches in the provincial towns; and in 1833 withdrawing the Bank of England's monopoly altogether. Banks were then free as a consequence to expand from single-office operations into branch networks through a process of expansion and mergers. The foundation of today's British banks dates from this time.
During this period the debate about the future of money and banking intensified, with the banking school arguing that banks should be free to issue notes as they saw fit, so long as they were prepared to meet all demands for encashment into specie. The currency school argued instead for bank note issues to be tied strictly to specie held in reserves. The controversy between these two schools ended with the Bank Charter Act of 1844, which required the Bank of England to back its note issue with gold, with the exception of £14,000,000 of unbacked notes already in circulation. The intention was for Bank of England notes to gradually replace those issued by other banks in England and Wales (Scottish banks still issue their own notes to this day).
Thus it was that the Bank Charter Act of 1844 sided with the currency school, so far as the note issue was concerned; but by neglecting the issuance of credit, modern fractional reserve banking was born.
It can be seen that Gibson's paradox had to survive substantial variations of economic and monetary conditions likely to disrupt any correlation between the level of wholesale prices and interest rates. If there was a common factor over the two centuries, it was that the domestic UK economy expanded rapidly, facilitated initially by a developing network of canals, which in addition to river and sea navigation enabled the transport of goods throughout the country for the first time. As the industrial revolution progressed, the new science of thermodynamics led to the development of steam power, fuelled by coal which was found and mined in abundance. The mechanisation of factories and mills together with the subsequent development of railways rapidly increased both productivity and the speed of transport and communications. Her position as an important global power gave Britain access to raw materials and overseas markets to fuel economic and technological progress. Britain was so successful that before the First World War eighty per cent of all shipping afloat at that time had been built in Britain. Finally, in the post-war decade to 1930 Britain underwent massive social and political changes, which were generally destructive to the accumulated wealth of the previous century.
GOLD SUPPLY
Without an increase in the quantities of gold available the expansion of economic activity brought about by the industrial revolution would have been expected to lead to a trend of falling prices. As it was, new mines were discovered, notably in California, the Klondike, South and West Africa, and Australia. By 1730 the estimated aboveground stocks accumulated through history were about 2,400 tonnes, and by 1930 they had increased to 33,000 tonnes.7 Britain's population increased from roughly seven million to forty-five million. In other words, the quantity of gold available for money increased at roughly double the rate of the British population over the two centuries.
Other things being equal, the net monetary effect from the increase in the quantity of above-ground gold stocks can be expected to reduce its purchasing power relative to goods; but it is an historical fact that the rapid industrialisation over the period raised the standard of living and life expectancy for the average person considerably, thereby offsetting the inflationary price effects of increased above-ground stocks, so much so that prices appear to have fallen by 20% between 1820 and 1900 according to the ONS figures used in Chart 1.
THE QUANTITY THEORY OF MONEY
The quantity theory as it is generally understood today dates back to David Ricardo, who ignored the transient effects of changes in the 11 quantity of money on prices in favour of a long-run equilibrium outcome. In 1809 Ricardo took the position that the reason for the increase in prices at that time was due to the Bank of England's over-issue of notes. His interest in this respect glossed over the short-run distortions identified by Cantillon and Hume. In the Ricardian version an increase in the quantity of money would simply result in a corresponding rise in prices.
While this relationship is intuitive, it makes the mistake of dividing money from commodities and putting it into a separate category. An alternative view, consistent with the theories of the Austrian School, is to regard money as a commodity whose special purpose is to act as a fungible medium of exchange, retaining value between exchanges. This being the case, it must be questioned whether or not it is right to put money on one side of an equation and the price level on the other.
This is not to deny that a change in the quantity of money for a given quantity of goods affects prices. That it is likely to do so is consistent with the relationship between the relative quantities of any exchangeable commodities. Furthermore, there is an issue of preferences changing between the relative ownership of one commodity compared with another; in this case between an indexed basket of goods and money. Changes in the general level of cash liquidity can have a disproportionate effect on prices, irrespective of changes in the quantity of money in issue at the time.
By ignoring these considerations it is possible to conclude that changes in the quantity of money in circulation are sufficient to control the price level. It is this assumption that Gibson's paradox challenges. To modern macroeconomists the price of money is its rate of interest, though to followers of the Austrian school, this is a gross error. To them, the price of money is not the rate of interest, but the reciprocal of the price of a good bought or sold with it. Furthermore, under this logic money has several prices for each good or service, which will differ between different buyers and sellers depending on all the circumstances specific to a transaction. This is consistent with the Austrian school's observation that prices are 12 entirely subjective and they cannot be determined by formula.
Macroeconomics does not recognise this approach, and averages prices to arrive at an indexed price level. Austrian school economists argue that mathematical methods are wholly inappropriate applied to the real world. Apples cannot be averaged with gin, nor can gin be averaged even with another brand of gin. Averaging the money-values of different products cannot escape this reality.
The rate of interest on money is its time-preference; and again, depending on what the money is intended to be exchanged for its time-preference must match inversely that of the individual good. In other words, by deferring the delivery of a good and paying for it up-front it should be possible to acquire it at a discount. There is the possession of the money foregone, the uncertainty of the contract being fulfilled and the scarcity of the good, which all combine into a time-preference for a particular deferred transaction.
The quantity theory of money ignores this temporal element in the exchange of money for goods. In doing so, it fails to account for the fact that in free markets demand for money, reflected in its time-preference, must correlate with demand for goods.
The quantity theory, by putting money on one side of an equation and goods on another suggests the relationship is otherwise. This gives us an insight into why the quantity theory of money is flawed, and when we explore the Gibsonian relationship between interest rates and the price level it will become obvious why interest rates do not correlate with the rate of price inflation.
THE SOLUTION TO GIBSON'S PARADOX
In the discussion covering the flaws in the quantity theory of money in the previous section clues were given as to how the paradox might be resolved. The starting point is to recognise that money is simply a commodity, albeit with a special function, to act as the temporary store of labour between production and consumption.
We can see that including money, commodities necessary for human progress were in demand during a period of unprecedented economic expansion over the two centuries between 1730 and 1930. In some cases, such as in exchange for harvested grains, the price of gold would have varied from season to season, often wildly. But with all the individual goods, there will have been a match with their time-preferences between manufactured goods and gold and gold substitutes. Therefore, the interest rate on money offered by banks is the other side of the time-preferences of the goods produced by their borrowers, who were predominantly manufacturers and merchants seeking trade finance.
The reason interest rates are set by the demands for money by manufacturers is they have to expend capital in order to produce. Capital becomes one of two essential elements of the price of a future good, the other essential being profit. The capital value of an asset used in production is the sum of the value of output it generates discounted to its present value. If prices of goods are rising, the producer can increase his time-preference in the expectation of higher end-prices for his production. Alternatively, if prices are not rising, or even falling he is limited in his time-preference.
This explains why when prices generally rose, bond yields, as proxy for term interest rates paid by borrowers, also rose. Equally, when prices fell, a producer was less able to bid up his time preferences, so term interest rates fell. In other words, before central banks took upon themselves to control interest rates, interest rates simply correlated to demand for capital from producers.
This analysis of the relationship between prices is wholly in accordance with Carl Menger's insight, that a price only exists for commodities and goods for which supply is limited to less than potential demand.8
POST-1930
After 1930 the paradox was still observed until the 1970s, when the relationship appeared to break down.
https://gm-media-library.s3.eu-west-...febdab1363.png
In the 1970s price inflation according to the ONS accelerated from 5.4% in 1969, to 17.1% in 1974. During that time the Bank of England only increased interest rates under pressure from the markets. Interest rate policy fed a growing preference for hoarding goods and reducing personal cash balances. In this case, the correlation between bond yields and the price level reflected a shift in public confidence in the future purchasing power of the currency, which drove the time-preferences in the market, instead of widespread demand for capital investment.
Bond yields topped out in autumn 1974 before declining; but interest rates finally peaked in 1979/80. This is not fully reflected in the bond yield shown in Chart 4, because the yield curve was sharply negative at that time.
Since that tumultuous decade correlation ceased, and the Bank of England appears to have gained control over interest rates from markets.
It is hardly surprising that when central banks implement monetary policies to ensure that the price level never falls, the normal relationship between the price level and interest rates is interrupted. The relationship between savers and investing producers, which is the basis of the Gibson observation, becomes impaired.
CONCLUSION
The following question was raised earlier in this paper:
If Gibson's paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks' success in substituting pure fiat currency in place of sound money. If the Paradox is solely a consequence of metallic or sound money it might pose no threat to the modern currency system; otherwise it may have profound implications.
It is clear that the difference between markets historically and those of today is that interest rates were set by the demand for savings to invest in production, while today they are set by monetary policy. Monetary policy is not consistent with the basic function of interest rates, which is to reflect a market rate between savers and borrowers to balance supply and demand. Instead, monetarists believe otherwise, that interest rates can be used to regulate the quantity of money.
Gibson's paradox is not dependent on metallic or sound money so much as it is dependent on free markets distributing savings in accordance with demand from borrowers investing in their businesses. We must therefore conclude that monetary policies intended to suppress this effect do have profound implications.
Keynes in his General Theory in 1936 wrote the following in his concluding notes:
"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."9
The long, slow euthanasia of Keynes's rentier class is what has changed. Businesses obtain the funds for investment from other sources directed by the financial system. Savers are channelled increasingly into stock markets, where they participate in businesses as co-owners, instead of lending to them indirectly through the banking system. The banks provide working capital, mainly through the expansion of bank credit, at rates primarily determined not by supply and demand for savings, but set by central banks.
Central banks' insistence on monetary solutions to economic problems have not only buried the Say's law relationship between savers and investing entrepreneurs, they have turned the principal objective of entrepreneurs from patient wealth creation through the accumulation of profits into ephemeral wealth creation through the accumulation of debt. They have been caught up in a credit cycle created by central banks and are no longer borrowing genuine savings from savers who expect to be repaid. If Gibson's paradox had been satisfactorily explained by Tooke or Gibson, the assumptions behind the quantity theory of money and its derivatives would have been thrown into doubt before they became central to monetary policy.
This is a dramatic claim perhaps, but it might have demolished the suppositions behind the quantity theory of money, which became Fisher's equation of exchange, and the brand of monetarism followed by the Chicago school under Milton Friedman. Misleading ideas, such as velocity of circulation in the equation of exchange would have not been taken as meaningful economic indicators. As it is Gibson's paradox is unknown to the majority of economists today, who assume the quantity theory of money is unchallengeable.
So, to put the explanation of Gibson's paradox at its simplest,
If the prices of goods are expected to rise, then their time preferences are bound to increase, and if they are expected to fall, their time preferences are bound to fall. That is why interest rates correlate with the price level.
Click here to view the entire Whitepaper as a PDF...
1 J M KEYNES, A TREATISE ON MONEY, VOL.2 P.1981930
2 IRVING FISHER, THE THEORY OF INTEREST, 1930.
3 FRIEDMAN AND SCHWARTZ, FROM GIBSON TO FISHER, EXPLORATIONS IN ECONOMIC RESEARCH NBER VOL. 3,2 (SPRING)
4 KNUT WICKSEL, INTEREST AND PRICES, 1936, TRANSLATED FROM THE GERMAN, GELDZINS UND GUTERPREISER, 1898.
5 NBER WORKING PAPER SERIES NO. 1680 GIBSON'S PARADOX AND THE GOLD STANDARD, 1985.
6 J M KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, 1936.
7 JAMES TURK, THE ABOVEGROUND GOLD STOCK: ITS IMPORTANCE AND ITS SIZE SEPT 2012 HTTPS://WWW.GOLDMONEY.COM/IMAGES/MED...DGOLDSTOCK.PDF (ACCESSED JULY 2015)
8 CARL MENGER: GRUNDSÄTZE DER VOLKSWIRTSCHAFTSLEHRE (PRINCIPLES OF ECONOMICS)1871.
9 JM KEYNES: THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY PP 376 OF THE 1936 EDITION.
The views and opinions expressed in this article are those of the author(s) and do not reflect those of GoldMoney, unless expressly stated. The article is for general information purposes only and does not constitute either GoldMoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, GoldMoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. GoldMoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.
Copyright
2024 Goldmoney Inc. All rights reserved.
- #12,174
- Feb 2, 2024 8:26am Feb 2, 2024 8:26am
- | Commercial User | Joined Dec 2014 | 14,162 Posts
https://gm-media-library.s3.eu-west-...20af2b6e34.pdf
CONCLUSION
The following question was raised earlier in this paper:
If Gibson's paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks' success in substituting pure fiat currency in place of sound money. If the Paradox is solely a consequence of metallic or sound money it might pose no threat to the modern currency system; otherwise it may have profound implications.
It is clear that the difference between markets historically and those of today is that interest rates were set by the demand for savings to invest in production, while today they are set by monetary policy. Monetary policy is not consistent with the basic function of interest rates, which is to reflect a market rate between savers and borrowers to balance supply and demand. Instead, monetarists believe otherwise, that interest rates can be used to regulate the quantity of money.
Gibson's paradox is not dependent on metallic or sound money so much as it is dependent on free markets distributing savings in accordance with demand from borrowers investing in their businesses. We must therefore conclude that monetary policies intended to suppress this effect do have profound implications.
Keynes in his General Theory in 1936 wrote the following in his concluding notes:
"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."9
The long, slow euthanasia of Keynes's rentier class is what has changed. Businesses obtain the funds for investment from other sources directed by the financial system. Savers are channelled increasingly into stock markets, where they participate in businesses as co-owners, instead of lending to them indirectly through the banking system. The banks provide working capital, mainly through the expansion of bank credit, at rates primarily determined not by supply and demand for savings, but set by central banks.
Central banks' insistence on monetary solutions to economic problems have not only buried the Say's law relationship between savers and investing entrepreneurs, they have turned the principal objective of entrepreneurs from patient wealth creation through the accumulation of profits into ephemeral wealth creation through the accumulation of debt. They have been caught up in a credit cycle created by central banks and are no longer borrowing genuine savings from savers who expect to be repaid. If Gibson's paradox had been satisfactorily explained by Tooke or Gibson, the assumptions behind the quantity theory of money and its derivatives would have been thrown into doubt before they became central to monetary policy.
This is a dramatic claim perhaps, but it might have demolished the suppositions behind the quantity theory of money, which became Fisher's equation of exchange, and the brand of monetarism followed by the Chicago school under Milton Friedman. Misleading ideas, such as velocity of circulation in the equation of exchange would have not been taken as meaningful economic indicators. As it is Gibson's paradox is unknown to the majority of economists today, who assume the quantity theory of money is unchallengeable.
So, to put the explanation of Gibson's paradox at its simplest,
If the prices of goods are expected to rise, then their time preferences are bound to increase, and if they are expected to fall, their time preferences are bound to fall. That is why interest rates correlate with the price level.
Click here to view the entire Whitepaper as a PDF...
1 J M KEYNES, A TREATISE ON MONEY, VOL.2 P.1981930
2 IRVING FISHER, THE THEORY OF INTEREST, 1930.
3 FRIEDMAN AND SCHWARTZ, FROM GIBSON TO FISHER, EXPLORATIONS IN ECONOMIC RESEARCH NBER VOL. 3,2 (SPRING)
4 KNUT WICKSEL, INTEREST AND PRICES, 1936, TRANSLATED FROM THE GERMAN, GELDZINS UND GUTERPREISER, 1898.
5 NBER WORKING PAPER SERIES NO. 1680 GIBSON'S PARADOX AND THE GOLD STANDARD, 1985.
6 J M KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, 1936.
7 JAMES TURK, THE ABOVEGROUND GOLD STOCK: ITS IMPORTANCE AND ITS SIZE SEPT 2012 HTTPS://WWW.GOLDMONEY.COM/IMAGES/MED...DGOLDSTOCK.PDF (ACCESSED JULY 2015)
8 CARL MENGER: GRUNDSÄTZE DER VOLKSWIRTSCHAFTSLEHRE (PRINCIPLES OF ECONOMICS)1871.
9 JM KEYNES: THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY PP 376 OF THE 1936 EDITION.
The views and opinions expressed in this article are those of the author(s) and do not reflect those of GoldMoney, unless expressly stated. The article is for general information purposes only and does not constitute either GoldMoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, GoldMoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. GoldMoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.
Copyright 2024 Goldmoney Inc. All rights reserved.
CONCLUSION
The following question was raised earlier in this paper:
If Gibson's paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks' success in substituting pure fiat currency in place of sound money. If the Paradox is solely a consequence of metallic or sound money it might pose no threat to the modern currency system; otherwise it may have profound implications.
It is clear that the difference between markets historically and those of today is that interest rates were set by the demand for savings to invest in production, while today they are set by monetary policy. Monetary policy is not consistent with the basic function of interest rates, which is to reflect a market rate between savers and borrowers to balance supply and demand. Instead, monetarists believe otherwise, that interest rates can be used to regulate the quantity of money.
Gibson's paradox is not dependent on metallic or sound money so much as it is dependent on free markets distributing savings in accordance with demand from borrowers investing in their businesses. We must therefore conclude that monetary policies intended to suppress this effect do have profound implications.
Keynes in his General Theory in 1936 wrote the following in his concluding notes:
"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."9
The long, slow euthanasia of Keynes's rentier class is what has changed. Businesses obtain the funds for investment from other sources directed by the financial system. Savers are channelled increasingly into stock markets, where they participate in businesses as co-owners, instead of lending to them indirectly through the banking system. The banks provide working capital, mainly through the expansion of bank credit, at rates primarily determined not by supply and demand for savings, but set by central banks.
Central banks' insistence on monetary solutions to economic problems have not only buried the Say's law relationship between savers and investing entrepreneurs, they have turned the principal objective of entrepreneurs from patient wealth creation through the accumulation of profits into ephemeral wealth creation through the accumulation of debt. They have been caught up in a credit cycle created by central banks and are no longer borrowing genuine savings from savers who expect to be repaid. If Gibson's paradox had been satisfactorily explained by Tooke or Gibson, the assumptions behind the quantity theory of money and its derivatives would have been thrown into doubt before they became central to monetary policy.
This is a dramatic claim perhaps, but it might have demolished the suppositions behind the quantity theory of money, which became Fisher's equation of exchange, and the brand of monetarism followed by the Chicago school under Milton Friedman. Misleading ideas, such as velocity of circulation in the equation of exchange would have not been taken as meaningful economic indicators. As it is Gibson's paradox is unknown to the majority of economists today, who assume the quantity theory of money is unchallengeable.
So, to put the explanation of Gibson's paradox at its simplest,
If the prices of goods are expected to rise, then their time preferences are bound to increase, and if they are expected to fall, their time preferences are bound to fall. That is why interest rates correlate with the price level.
Click here to view the entire Whitepaper as a PDF...
1 J M KEYNES, A TREATISE ON MONEY, VOL.2 P.1981930
2 IRVING FISHER, THE THEORY OF INTEREST, 1930.
3 FRIEDMAN AND SCHWARTZ, FROM GIBSON TO FISHER, EXPLORATIONS IN ECONOMIC RESEARCH NBER VOL. 3,2 (SPRING)
4 KNUT WICKSEL, INTEREST AND PRICES, 1936, TRANSLATED FROM THE GERMAN, GELDZINS UND GUTERPREISER, 1898.
5 NBER WORKING PAPER SERIES NO. 1680 GIBSON'S PARADOX AND THE GOLD STANDARD, 1985.
6 J M KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, 1936.
7 JAMES TURK, THE ABOVEGROUND GOLD STOCK: ITS IMPORTANCE AND ITS SIZE SEPT 2012 HTTPS://WWW.GOLDMONEY.COM/IMAGES/MED...DGOLDSTOCK.PDF (ACCESSED JULY 2015)
8 CARL MENGER: GRUNDSÄTZE DER VOLKSWIRTSCHAFTSLEHRE (PRINCIPLES OF ECONOMICS)1871.
9 JM KEYNES: THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY PP 376 OF THE 1936 EDITION.
The views and opinions expressed in this article are those of the author(s) and do not reflect those of GoldMoney, unless expressly stated. The article is for general information purposes only and does not constitute either GoldMoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, GoldMoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. GoldMoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.
Copyright
2024 Goldmoney Inc. All rights reserved.
- #12,175
- Edited 8:55am Feb 2, 2024 8:33am | Edited 8:55am
- | Commercial User | Joined Dec 2014 | 14,162 Posts