Pages
Stay In Touch
More
chrislbecker.com by Chris Becker is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
Just adding a bit to Chris’ post, it’s McD who has ”the causation roughly backward.” It’s not input prices that determine final output prices. It works the other way: Final money prices (in this case, of gold) are determined by subjective final money demand. Rising/falling demand for final products raises/lessens demand for inputs used to produce those final products.
For example, house prices weren’t rising during the housing boom because steel, cement and building sand costs were going crazy. Rather, steel, cement and building sand prices were being bid up by contractors who expected their final products to fetch much higher prices as home-buyers juiced their buying power with fractional bank credit.
This is why when people say that house prices can’t fall because it costs x to build them, they get it totally wrong. The only way for the input prices to fall is if final monetary demand falls.
Oil prices clearly do have their own independent final demand, which adds complexity to the issue. Prices are highly complex. But to say that gold and oil prices have a roughly consistent ratio only because oil is an input into gold production is to say essentially that the gold price would have risen irrespective of final subjective demand. This is not true at all. If final subjective demand for gold dropped to zero, the price of gold would drop to zero – it would become worthless to us – no matter how much it cost to pull out the ground. On the other hand, even if oil prices plummeted due to say a huge new oil discovery, if gold demand remained the same or increased, there would be no reason why gold prices should necessarily fall.
In addition, oil is used in far greater quantities for non-gold production purposes. Rising oil prices due to final fuel demand would if anything displace income that could otherwise be spent on gold and would actually cause gold prices to fall. But notice how we don’t observe this. Why? Because as Chris made clear, “it is the exchange ratio of the rand to both gold and oil that is going down because paper monies are being debased, and that this is why the price of both gold, oil, wheat, soybeans, etc. have all increased since 1971 in paper money terms.“ In other words we tend to observe roughly ‘stationary’ ratios of commodities with each other, but ‘non-stationary’ ratios of commodities with money, because money is being constantly and permanently debased by politicians. Gold money prices can rise EVEN WHEN oil money prices rise because rising oil prices are not displacing demand from elsewhere, they are merely the praxeological result of rising money supply.
This also shows the corollary: falling oil prices, due to say the discovery of new, more efficient energy technology, would release income to be spent elsewhere, and gold prices could actually rise.
Of course, what a high final price and low input prices would subsequently do is entice new producers into the market, raising gold supply. This would, all else equal, begin to depress prices. But increasing supply in this way is a separate issue from input prices determining final prices at McD asserts. In fact, as new entrants enter the market and bid for more inputs while at the same time increasing supply and lowering final prices, we would actually see input prices RISING and final prices FALLING at the same time, squeezing profit margins.
In fact the very fact of profit margin cycles shows that input and final prices OFTEN move in different directions, but market forces tend to restore their exchange ratios over time (unless there is a major technological shift), but not in the way McD asserts.
Share this
[...] the information in this article remains intact as well as the footer.Article from articlesbase.com The only thing actually tied to gold is the deposit receipt. That would be a warehouse receipt for …er but not representing a specific ingot. The whole point of currency is to get away from the [...]
Hello Russ. Lots to say about this, but it’s late on Sunday night so I’ll try to keep ‘er brief.
The “causation” that I referred to in this case is whether the price of oil is determined by the value of gold. My point is that, actually, gold also reflects the price of oil. These two commodities, like many others, share common factors and characteristics. This, more than a simple question of whether average values are unchanged over a period, is why commodities generally move together with shifting economic fundamentals.
Beyond that, you are simply imparting a number of false views on my behalf, particularly with regard to input and final output prices. For instance, here is the final sentence in my comment to Chris:
“The point is that energy is a crucial input for all of them and ultimately determines supply prices.” [Emphasis added.]
You’ll notice that the word before “prices” is “supply” — not “final”. My entire argument has been to look at what is happening to both supply and demand. Indeed, I covered this issue in some depth in a previous post, which made specific mention of the extremely inelastic preferences that have maintained a (roughly) constant level of gold demand despite record prices.[*] And, yes, these are undeniably reflective of increased mining costs at the same time as demand is clearly paramount too.
Thus, rather than ignoring demand-side effects, my observations were largely motivated by the fact that graphs of the type that Chris provided completely overlook these endogeneity problems. To reiterate, the price-quantity combination that clears the market is determined simultaneously by supply and demand forces. Similarly, you do your best here to intimate that the price of inputs for a good is simply a mechanistic function of the final demand for that good. This, of course, is a extremely dubious assertion and I doubt that you could seriously hold such views if pressed on the matter. I’m not saying there is no relationship, but even your own writings betray some of the underlying tension and complexity:
“Rising demand for final products raises demand for inputs used to produce those final products.”
Versus
“Rising oil prices due to final fuel demand would if anything displace income that could otherwise be spent on gold and would actually cause gold prices to fall.”
Lastly, you write:
“[E]ven if oil prices plummeted due to say a huge new oil discovery, if gold demand remained the same or increased, there would be no reason why gold prices should necessarily fall.”
Possibly, but extremely unlikely given your later (correct) statement that “a high final price and low input prices would subsequently do is entice new producers into the market, raising gold supply. This would, all else equal, begin to depress prices.”
Ciao boet,
McD
[*] There is added complexity to this issue, because investment demand for gold is fast displacing jewelry demand at these high prices. Further gold supply actually declined for a time despite the price increase. Again, see this link for more detailed comment. My comments on oil priced in gold are really just following up from this earlier post and, indeed, another before that.
“…you do your best here to intimate that the price of inputs for a good is simply a mechanistic function of the final demand for that good. This, of course, is a extremely dubious assertion and I doubt that you could seriously hold such views if pressed on the matter.”
There is nothing “mechanistic” about price determination. It is always about ‘relative scarcity’.
‘Scarcity’ is not an objective/absolute quantum, but exists as a subjective/relative quantum; relative to the quantum of demand, since demand is the economic ‘end’.
In a fixed money supply world, there can be no persistent and general price inflation over time. Persistent and general price inflation can only result from rising final money expenditures, the result of rapid money creation ex nihilo.
And this was Chris’ point, that for a host of complex reasons, commodity prices generally maintain their exchange ratios through time (although they by no means HAVE TO by economic law), but the commodities-money relationship is non-stationary due to constant and rapid monetary debasement.
Without money supply expansion, persistent and general price inflation is not possible. Period.
Anyone who denies that money supply expansion is the chief cause of general price inflation over time is without question well on the fringes of economic science.
Anyone who denies that money supply expansion is the chief cause of general price inflation over time is without question well on the fringes of economic science.
“Inflation is always and everywhere a monetary phenomenon” – Milton Friedman.
Anyone who has been near a first-year economics course must have heard this famous quip. Many people beyond that as well. Honestly, the continued Austrian sense of exceptionalism on this issue is pretty bewildering to me.