Ritholtz, Business Insider picks up on the no-Debasement Meme

It turns out Monetary Realism sets the topics for the mainstream to discuss. First the Trillion Dollar coin, now debasement.

Here is good guy Barry Ritholtz writing on Bloomberg about the lack of debasement if you receive any interest at all:

“One of the favorite tropes of the “End the Fed” crowd is the “falling purchasing power of the U.S. dollar.” Google that phrase, and you will be rewarded with 91,100,000 results. (drop the “U.S.” and it doubles to 187,000,000 results).

The problem is, nearly all of these arguments are wrong.

As Matt Busigin of Macrofugue points out (echoed by Joe Wiesenthal of Business Insider), measuring the buying power of cash by functionally burying it in Mason Jars in the backyard is a misleading and inappropriate metric.”

We kicked off the no-Debasement discussion in the last post, pointing out Steve Waldman’s observation about how modest interest overcomes debasement from inflation.

Still, the times when Gold-buggery reached it’s max buggery-ness was during times when debasement was actually happening. During the last few years, the dollar has been losing value to inflation even after interest – and gold buggery has been off the charts. The same happened in the 1970’s, when the dollar was also being debased after interest payments.

You can see this clearly in the chart I posted last time, modified to make it clear gold bugs aren’t entirely crazy, but rather only partially crazy. People are actually losing money after interest today. Not much, but still losing money. Cash money also lost money after interest in the 1970’s, and briefly in the 1950’s.

And yes, this looks like something which could form the basis of a viable trading strategy. I will have to tell my kids about this trading strategy, because I’ll most likely be dead before we have another episode of cash being debased after interest.

Also Remember: Businesses hire when they are swamped with demand, not when they have high profits.  



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3 years 4 months ago

The implication here is that gold prices rise in response to negative real interest rates. The data seems to support this, though there is lots of scatter in gold prices, of course.

The graph plots Y/Y % change in gold price vs. “real interest rate”, defined as Mike does (3 month T-bill rate minus Y/Y change in CPIAUCSL). There is clearly a negative correlation between these quantities. The plot starts with 1972.

3 years 4 months ago

Mike, in order to do a fair comparison between cash and gold you need to include the gold lease rate.

Yes, the decline in the purchasing power of the dollar is compensated by the fact that you can lend cash out and earn interest. But you can also lend out your gold and earn the gold lease rate. The gold lease rate has historically fluctuated between 1-2% a year — this is a small amount, but if you compound it, it may affect your results.

(see here, for instance)

3 years 4 months ago


Is leasing out gold a normal thing gold holders do? I mean most people who have cash look to earn interest on it, even the measly one that a savings account offers.
But can the same be said of gold holders? Seems like its weird to think of gold bugs leasing out their gold.

3 years 4 months ago

Yes, but don’t forget that ideological gold holders, ie gold bugs, are a minority in the market. Central banks and large commercial banks, driven by purely rational motives, will lend out their gold to earn some extra income. Jewelers also participate in the leasing market. I’m sure that the SPDR GLD ETF leases out gold, they’d be nuts not to.

3 years 4 months ago

That’s interesting, I didn’t know gold had a rental income stream.

3 years 4 months ago

Never mind, read too fast. Thought you were comparing gold’s return to cash.