Don’t get me wrong: Nouriel Roubini is one of my absolute favourite economic-social-political voices right now: just behind Nassim Taleb, Laurence Kotlikoff and Tyler Durden, and just ahead of Thomas Hoenig, Matt Taibbi, Marc Faber, and Jim Rogers, and notable for being the only Keynesian in that mix. But he just said gold is in a bubble, and this is patent nonsense, and must be challenged. From MoneyWeb:
Alec Hogg: “And gold right now, you were quoted recently as saying that that’s also in a bubble.“
Nouriel Roubini: “Well, increase in the price of gold, in my view, is excessive. Gold can increase sharply whether because there is going to be high inflation and it’s a hedge against inflation but in advanced economies the last thing we have to worry about today is inflation, as the recession is going to lead to more slack in the goods market and the labour markets, in housing and it’s going to be there for disinflation or if not, deflationary. On the other side, gold does well when people are panicking about another global financial crisis, about when you’re so worried about your deposits in the bank not being safe, government debt not being safe either, in which case people, just out of fear, go into gold. I think that some of the rise of the gold is driven by that panic or fear about another global financial meltdown.”
Gold is a hedge against inflation? Really? That depends how you define inflation. According to the financier J.P. Morgan, “money is gold, and nothing else“. Now I am sure that we could debate the truth/untruth of that statement all day, but assuming that it is true opens up a very interesting new perspective: rising gold prices are by definition deflationary:
Under that scheme, we are experiencing a massive deflationary episode, hidden under the clothes of a massive money printing operation. But pricing things in gold, instead of Benny’s ponzi dollars, opens up an entirely new vista if we look at the value of the DJIA against gold:
The current DJIA:AU ratio is close to 1:8. At the peak of the NASDAQ bubble, when central banks were offloading gold, that ratio was more like 1:45. So Roubini is superficially correct that gold has risen a long way — until we note the fact that the DJIA:AU ratio throughout the last 200 years has tended to more like 1:1. In the 1800s it was as low as 5:1. One things Keynesians, and particularly Roubini do get correct is that global confidence, and therefore demand is shooting to once-in-a-century lows.
But the underlying factors causing the liquidity and confidence shocks aren’t going anywhere — military overspending, political corruption, indebtedness, withering infrastructure, oil dependence, deindustrialisation, geostrategic instability, bailout culture, the derivatives-industrial complex, food and fuel squeezes and so forth. So this gold-denomonated deflationary run will continue for a while yet. If the DJIA:AU goes back to 1:1 gold might run all the way to $5-11,000 (depending on how far the DJIA falls).
UPDATE: I think it’s crucial for me to emphasise that Dr. Roubini is one of my favourite voices because I enjoy his ideas, and not because I generally agree with him. I do not.
Sep 01, 2011 @ 12:21:30
Aziz, that’s a total mindfuck. Does that mean most “hyperinflationary” episodes are really hyperdeflationary because gold, the real currency, buys more and more?
I guess it’s not about volume of printing at all, it’s about the bricks-and-mortar economy. Anyway, keep up the good work.
Sep 01, 2011 @ 12:23:13
Gold’s purchasing power tends to increase during hyperinflation, so yes if we assume only gold is money, fiat hyperinflation is usually technically deflationary.
Sep 01, 2011 @ 13:37:36
If you double the supply of money, do you double the price of gold? After all, it’s same gold, double money, so dontcha need twice as much to buy the same amount of gold, crudely speaking?
Sep 01, 2011 @ 14:28:12
Crudely — i.e. ignoring the demand side — yes, you double the supply of fiat, you double the fiat price of gold. But from the perspective of gold, fiat has deflated. Keynesian economics turns everything on its head by dethroning gold as money and creating this new intermediary between the real economy, and gold.
Think of it like this: if your sole store of value since 2001 was gold, and you held no fiat at all, you would have experienced overall deflation, because your money would buy you more.
Sep 01, 2011 @ 14:27:50
“fiat hyperinflation is usually technically deflationary”
vs
“it’s same gold, double money, so dontcha need twice as much to buy the same amount of gold”
think of “General Relativity Theory For Currencies” – it depends what is your “currency frame of reference”.
the first case applies when fiat is money (not gold!), and gold is retaining it’s status as money by taking it back from fiat. that’s why you can buy more and more for gold – because you can buy more and more fiat, which you instantly swap for goods. this works if fiat flowing into the economy prefers to cover gold first rather than goods. if the flow omits gold, it would buy you less and less until it’s turn for gold to surge.
the other case is when gold is money, then fiat is seen as an asset.
personally, I stick to Mises’ definition of inflation/deflation as money supply changes. widely used definitions for them assume some “absolute frame of reference” associated with one currency (they also assume some absolute universal CPI). the misunderstanding comes from mixing these frames of reference within discussion.
Sep 01, 2011 @ 16:37:20
Excellent statement of the real world process!
This should be sent to “The Bernack” to help him avoid embarrasment when trying to answer questions before Congress. At least he sent the message that there is no monitary policy that can provide “money” for a spending more than the productive system can sustain.
Sep 02, 2011 @ 00:55:40
mantrid:
Itl looks like I will be writing the Theory of Monetary Relativity.
Sep 02, 2011 @ 01:02:58
http://www.carlosbondone.com/pdf/Theory_of_Economic_Relativity.pdf
Here is someone with a similar position to mine.
Sep 02, 2011 @ 23:58:57
Nourini in November 2009 when gold was at almost $1,100: “Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense”. -_-
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOfwpkHV2clM&pos=5
Sep 03, 2011 @ 00:25:06
Thanks Filip — the big issue with some economists, including our illustrious friend Dr. Doom — is that their understanding of the economy is viewed first and foremost through the prism of aggregate demand, when really the underlying picture is much spikier and twistier than that. The bigger issue here, and the factor pushing gold up, is of a global economy that is going through a fundamental rebalancing, making most macro models totally obsolete.
Sep 25, 2011 @ 14:08:14
Uh, but why do you admire Dr. Roubini so much?
Everytime I hear about him on local news being presented (by amateur non-economists) as the man who predicted the 2008 crisis I feel like throwing up a little. Really? There are tens of prominent man from non-economics philosophers like John N. Gray (who as early as 2002 predicted exactly what would happen) to investors that had skin in the game (Nassim Taleb, Michael Burry, John Paulson etc. etc.) that basically said the same thing years before the crisis started.
Actually, even a kindergarten child could have predicted the crisis when you presented the facts (there are 20 million excess homes that will keep increasing in value like chickens laying golden eggs, because this time is different and somehow we’ll find people to buy them). The only ones not able to predict the crisis where the economists and financiers who were directly profiting from the expanding bubble (basic human psychology).
Meanwhile, I think Dr. Roubini is enjoying his 15 minutes of fame and keeps churning out his 40-60% probability predictions about the future of the global economy.
Sep 25, 2011 @ 14:30:16
My admiration for him has significantly dropped in the last couple of weeks. A couple of days ago he tweeted that “the gold bubble has burst”. Yeah, right.
He has a lot of useful things to say on the shape of globalisation (but, again, I find myself disagreeing with him more and more), and he’s absolutely correcting in saying that massive global stimulus will not hold off the huge problems coming down the road. But he says a lot of crap, too. I do enjoy his way with words, though.
I notice that I omitted Jim Grant and Hugh Hendry in my list. Roubini has dropped below those in my estimation. My respect keeps growing for Jim Rogers, too.
Sep 25, 2011 @ 15:55:43
As a gold-bug myself, I try not to get emotional about the huge swings in the price. I expect huge, huge volatility in the price simply due to the paper-to-physical ratio of about 50:1 which means the price can basically go anywhere due to things like: deliberate manipulations, panic selling etc. But I expect that gold will have a place in the future monetary systems sooner rather than later for a simple reason: the world is becoming multipolar, and this is the one thing that all can trust. I think the fiat experiment since the fall of Bretton Woods would not have survived for so long had it not been for the “Pax Americana” unipolar world (in Bill Bonner’s words) of the last half a century.
Sep 25, 2011 @ 15:59:08
Forgot to mention something in my previous post (wish there was a way to edit): I find there are more things to dislike about Dr. Roubini besides his opinions on gold. After following him for a while, I find he’s lacking in logical thinking: meaning, not that he’s not intelligent, but he seems to exhibit the kind of black/white categorizations that Nassim Taleb would describe as “nerdiness” and/or “autism”.