Sneering At The Goldbugs

... is the theme of this piece by Noah Smith. It's worth reading and the comments are enlightening. Here's tiny tidbit.

If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices? In other words, the only central bank actions that should make gold prices rise are surprise actions - like printing even more money than people thought.

Now, Zero Hedge and the whole "goldbugosphere" tries to push the idea that they understand macroeconomics better than everyone else out there - that what is "obvious" to them is not obvious to most of the world, which is still in thrall to (Keynesians, neoclassical econ, Xenu, take your pick).

The problem with this line of reasoning is that it assumes a continuous model of the economy and that there are no inflection points where the equations and/or constants change in a discontinuous fashion. I would argue that just such a discontinuity occurred when we began to monetize debt at the $1T+ rate. As far as I know, we've never done that before, at least not over a prolonged period of time and nations that have done it in the past have all come to ruin.

I'm open for counterexamples.

In the comments are links to a trio of regression charts showing the linkage between M2 money supply* and the price of gold. For some reason, the machine I'm on isn't opening them, but here's a similar chart from Uncommon Wisdom.

There's definitely an inflection point and a correlation after the inflection point. Before the inflection point in money supply, I wouldn't take any bets on a linkage. To me, that says there are two distinct models of the economy at work, one pre-monetization and one post-monetization. That's exactly what you'd expect from looking at the history of other countries who've tried the same thing - late Bourbon France, the Confederacy, Weimar Germany and recent Zimbabwe.

My final take is one I left in the comments of that post: Noah's position seems to be that monetizing debt to the tune of a trillion dollars a year with no end in sight has not been a problem yet and won't be and the gold bugs position is that it has not been a problem yet, but will be.

I'm still not a fan of gold, but I'm certainly not going to sneer at those who are.

* - M2 is the amount of money in circulation in notes and coin plus non-interest-bearing bank deposits, building-society deposits, and National Savings accounts.