Posted by: graemebird | February 21, 2008


From Catallaxy:

“Gold is headed up*. If the RBA is smart they will ensure that the aussie dollar is following it.”

They might take your advice Terje but they must not, they CANNOT take it blind.

They might take the general idea that you have that one ought to tighten when gold and commodities loosen, and that a sudden softening of commodities and gold might be one clue amongst many that monetary policy could be too HARSH.

I’ll buy that as a general proposition. But really, all the commentators are flying blind here. And such omens as you suggest, though admittedly they tend to backtest pretty well except in extremis……….. well they may be of some assistance in this blind-flying but they are not enough.

If gold keeps going up perhaps we should say that this gives us a BIAS-for-tightening. I’m with you so far if that is what you are saying.


If you have a fiat currency you might toss up between having productive expenditure grow in nominal terms 0.5% per quarter or 1% per quarter or yet even 0% and just let it flatten for awhile.

So if you were trying to follow gold, as you say,…………well you might flatten the growth in productive expenditure out for several quarters.

But you ought never let PRODUCTIVE EXPENDITURE actually fall (in my view) if you are on a fractional-fiat currency.

Because COSTS-OF-GOODS-SOLD follows PRODUCTIVE EXPENDITURE in its trajectory with a lag.

Therefore if you let PRODUCTIVE EXPENDITURE actually take a dip, you are setting up a potential disaster, as you can in the next time period, have a situation where even the best run businesses, producing desperately needed gear, are running at a loss.

But I accept your general bias. And I just want to add this friendly amendment of not flying blind with it.

Always remember that our greatest living economist, with not even a single close contender, is George Reisman.



  1. A long time ago I gave up commenting on your blog because you were repeatedly rude to me. However with time I tend to mellow so I’ll add a comment.

    Rather than agree or disagree I’ll just suggest you take a look at the GVM model discussed at I’m not saying it’s correct or universally applicable but it is an idea worth being familiar with. Also there is a good crowd of people there always interested in discussing the signal that gold is sending. They don’t all come at it from the same perspective but generally all of them have looked at this issue enough to know in their bones that gold needs to be near the centre of any functional monetary system.

  2. I’ll look on but I say this with a sense of weariness.

    Yes the supply-siders are good people and my kind of crowd but they seem to take a sort of mystical view to economic science.

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