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Austrian position on Gibson's Paradox and/or Barsky-Summers interpretation?

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John Overstreet Posted: Tue, Jul 10 2012 8:12 AM

I've been thinking a lot about Gibson's Paradox the last few weeks, and I reread Barsky and Summer's paper on it. In the process, I think I came up with a model that significantly improves on their version, although I am unable to provide a theoretical explanation of precisely how it functions, since I am not an economist. 

Here's the shortish version:

Barsky and Summers showed that the log of real gold and "non-ferrous metals" prices (which I have substituted copper prices for) were inversely correlated with real interest rates. They mention in passing that gold doesn't track those rates as well as non-ferrous metals ('other factors' also determine gold's price, they say) and they are rather surprised at how closely non-ferrous metals track with real interest rates, but they don't go beyond that, as far as I can tell.

I believe, however, that it is the copper/gold ratio that is inversely correlated with real interest rates, i.e., the gold/copper ratio is correlated with real interest rates. Moreover, I believe that the gold/copper ratio leads real interest rates by sixteen months. 

I was thinking about these things in a market context, and I found that significant jumps in the gold/copper ratio (something in the neighborhood of a factor of 2 in terms of gold's dollar prices over copper's price in cents) were followed in approximately a year's time by a "global banking crisis" as defined by Reinhart and Rogoff in their book "This Time is Different" (in almost every instance going back to 1980), as well as weak markets. I don't know how many of these crises and market slumps were spurred by a jump in real interest rates, but it seems like a plausible connection.

A similar such jump in the gold/copper ratio occurred last year and counting forward sixteen months would bring us to the latter half of this year, especially the last quarter of 2012. 

Does this jive with Austrian economic theory?

One of the curious things is that nominal interest rates are almost inversely correlated with the gold/copper ratio, which would superficially stand Gibson's Paradox on it's head. And, it seems very strange that gold/copper would lead real interest rates by sixteen months. I have found that the gold/oil ratio also tends to lead interest rates by sixteen months, and I suspect that the silver/oil ratio does, as well.

I am under the impression that at least everything apart from the sixteen-month lead would fit into Austrian interpretations of the market, but I wonder if the correlation between the gold/copper ratio and nominal interest rates could be explained as well and if they fit into this sixteen-month lead, which is what I suspect--namely that the dance between nominal rates and the copper/gold ratio represents a market torn between a fiat system and a deeper systemic "knowledge" of gold's monetary function?

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Bogart replied on Tue, Jul 10 2012 8:18 AM

This is another one of those relations that has been true and MIGHT be true in the future.  Or in a smaller form: It is true until it isn't.

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Well, yes, of course. Without being able to explain the phenomenon, that is the answer to all such correlations. 

But, my question is precisely about the causation. 

In fact, never mind the gold/copper ratio as such. Should a commodity money/industrial commodity price ratio fit better with inverted real interest rates than should the dollar-denominated prices of either of those commodities a la Barsky and Summers? And, if so, what might explain a 16-month lead?

Or, are you suggesting that Gibson's Paradox is simply another one of those correlations that are true until they are not?

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