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“Interest rates to remain at zero for
the next two years.” Those
were the words of Fed Chair - Sir Benjamin of Bernanke last week. With inflation beginning to pick-up
– the notion that rates would remain at zero for a prolonged period of
time seems “paradoxical” to conventional economic thought. There have been other misunderstood
‘paradoxes’ in economics in modern times. Here’s how Wikipedia explains the
relevance of this famous benchmark in economics:
Gibson's paradox
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Gibson's Paradox is the
observation that the rate of interest
and the general level of prices are observed to be positively correlated. It is named for British economist
Alfred Herbert Gibson who noted
the correlation in a 1923 article for Banker's
Magazine.
The term was first used by John Maynard
Keynes, in his 1930 work,
A Treatise on Money. It was
believed to be a paradox because most economic theorists predicted that the correlation would be negative.
Keynes commented that the
observed correlation was "one of the most completely established empirical facts in the whole field of quantitative economics."
Boiled down - Gibson’s Paradox, as first described by
Keynes - is the acknowledgement
that movement in interest rates and the general price level [inflation] were positively correlated. This was viewed as “paradoxical”
because classically
– economists expected
higher interest rates to
‘arrest’ demand
which, it was thought, would lead to lower prices.
When speaking of Keynes comments regarding Gibson’s Paradox – what most modern day economists fail to appreciate / mention is that Keynes comments regarding Gibson’s Paradox were implicitly referencing a time period in which the Gold Standard was in
force; namely, the 1821 – 1913 time period.
Folks
who feel that study / attention paid to Gibson’s Paradox is superfluous,
they should be reminded of the academic work / study done by Messrs Barsky and Summers at Harvard in the late 1980’s – the basis of which Lawrence Summers brought to Washington as Under Secretary
of Treasury under Robert
Rubin during the 1st Clinton
Administration.
It was Reg Howe in a 2001 treatise,
Gibson's Paradox Revisited: Professor Summers Analyzes Gold Prices, that first shed
light on relevance / importance of gold prices to
the determination of interest
rates. First, citing
Barsky / Summers work – Howe pointed out:
…[Barsky and Summers
concluded] that it was "primarily a gold standard phenomenon"
(at 530) that applies to real rates of return. Regression
analysis of the classical
gold standard period, 1821-1913, shows a close correlation
between long-term interest rates and the general price level. The correlation is not as strong for the pre-Napoleonic era, 1730-1796, when Britain effectively adhered to the gold standard but many
other nations did not,
and "completely breaks down during the Napoleonic war period of 1797-1820, when the gold standard was abandoned" (at 534).
Howe
then went on to further explain the crux of Barsky and Summers findings – citing passages from their executive summary:
With the nominal price of gold fixed, Barsky and
Summers note (at 529) that "the general price level is
the reciprocal of the price
of gold in terms of goods.
Determination of the general
price level then amounts to the microeconomic problem of determining the relative price
of gold." For this, they develop a simple model (at 539-543) that assumes full convertibility between gold and
dollars at a fixed parity, fully flexible prices for goods and services,
and fixed exchange rates.
And,
“…the bottom
line of their analysis is that gold prices in a free market should move inversely to real interest rates.”
If we only read mainstream sources [like
Wikipedia] we might falsely believe that Gibson’s Paradox is only about
interest rates and the general price level. We can credit Howe – citing Barsky and Summers’ work - with drawing the
importance and inter-relatedness of the gold standard to interest rates.
When applied to the political realities of the
day [1992 – 1995 timeframe] when Clinton first came to power in
Washington – it’s important and helpful to remember the following:
·
from 1993 - 1995, the U.S. economy was being
dogged by a stubborn recession, casting doubts on Clinton’s re-election
·
Rubin [a former gold trader / overseer of gold
operations at Goldman Ldn. during the 1980’s
and Chairman of Goldman Sachs] came to Washington in 1993 [first as director
of National Economic Council] and then [in 1995] as Treasury Secretary. He brought with him Lawrence Summers
as Under Secretary.
Summers’ understanding and study of gold made him a
“useful idiot”.
·
These qualities made Rubin such a logical
successor to Lloyd Bentsen.
·
Rubin needed to invigorate economy to get
Clinton re-elected. Deficit
spending would have typically led to a RISE in interest rates and prices.
·
Summers / Barsky’s
academic work theorized that deficits could be run SO LONG as the price of
gold remained constant or did not power higher.
·
A program of gold price manipulation was
hatched simultaneously with the establishment of an interest rate control
grid – essentially giving the U.S. Fed / Treasury control of not only
the short end of the interest rate curve – but also the long end of the
interest rate curve. Note how the
geometric growth of Derivatives stems from this timeframe.
·
REMEMBER:
82 % of ALL OUTSTANDING notionals are
interest rate derivatives and the Office of the Comptroller of the Currency
[OCC] tells us there are no [identifiable] end users for these products. Just because the OCC tells us there
are no identifiable end users of endless TRILLIONS of these products –
DOES NOT MEAN that the investment dealers do not have counterparties for
them.
·
The Reality: The undeclared counterparty for these
interest rate determining trades is the EXCHANGE
STABILIZATION FUND [a secretive arm of the U.S. Treasury] acting through
the New York Federal Reserve.
They engage in this activity to generate settlement demand for U.S.
Government Securities thus creating the FALSE illusion of scarcity.
·
The derivatives complex acts as A PRICE CONTROL GRID of all strategic
commodities from capital itself [via interest rates] to precious metals, to
equities and energy.
 
source:
Office of the Comptroller of the Currency
Morgan
Stanley Lays An Egg: the Footprint of the ESF
When one considers that Morgan Stanley “strapped
on” 9 Trillion [according to the OCC in Q1/2011] in notional of
products that require 2-WAY–CREDIT-CHECK – we should all now be
scratching your head as to “WHO” or perhaps “WHAT”
would be an agreeing counterparty to such STAGGERING 9 trillion of two-way-risk
trade with Stanley in 3 months????? Remember folks, a couple of years
ago – no institution would consider buying / acquiring Stanley for any
amount.
The ONLY
answer – is that the EXCHANGE STABILIZATION FUND is acting in the int.
rate swap market [through the N.Y. Fed] “RECEIVEING” 5 – 10
year swaps at “FIXED RATES” [meaning Stanley is paying the ESF
fixed rate and the ESF is in turn paying them ‘floating’ 3 month libor, but does not exchange bonds with Stanley]. Morgan
Stanley “IS” a spread player and the ESF is NOT. [the custom in int. rate swaps of 3
– 10 year duration is for the “receiver” of fixed to sell
the “payer” of fixed a duration weighted amount of government
bonds of the tenure of the swap, ie 25 million
notional of 5 year swap would entail a physical bond trade of roughly 25
million 5 yr. gov’t bonds.]
This FORCES Stanley into the bond market to
purchase the required amount of bonds to hedge their trades. [this has the
added benefit of being quite profitable if you are the Exchange Stabilization
Fund – especially when you KNOW [and no one else does] that short term
rates are NEVER going to go up.
This serves to make US bonds
“SCARCE” for settlement purposes [fails to deliver data available
open source confirms this] over the past few years – and has served to
give the U.S. Treasury / Fed control of the long end of the int. rate
curve. This is why interest rates are so PERVERSELY LOW today. It really has NOTHING to do with
“flight to quality” or “liquidity”.
This has all been perpetrated on humanity by a
group of elite, narcissist, globalist Central Bankers to obscure the reality
that “their” FIAT MONEY is FAILING – in spades.
Got physical precious metal yet?
Rob Kirby
KirbyAnalytics.com
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