I think finance people do not understand the monetary system including the experts. When Bretton Woods ended there became a new system. A new system needs new models. I find it hard to believe that models created for a gold standard or gold exchange standard are used for a floating rate exchange system. The relationships may still exist, but the models need adjusting as the transmission mechanisms have changed. If the US changed to the metric system using the same rulers with inches and feet marked would be less than perfect. This may explain the “less than perfect forecasting rate” of the IS/LM, Phillips Curve, Beveredge Curve, ABCT models, to just name a few, and the failure of many economists to foresee the previous crisis. Thinking about how the models have not changed reminds me of a story by Charlie Munger in a lecture to university students where he said:

“I watched the same thing happen at the Jules Stein Eye Institute at UCLA. I asked at one point, why are you treating cataracts only with a totally obsolete cataract operation? And the man said to me, “Charlie, it’s such a wonderful operation to teach.”

Academic Economists: Charlie Munger

In the current monetary system the currencies we use do not fit all three characteristics of money listed by Aristotle. The US Dollar is only a medium of exchange and unit of account. In the current system our time is the store of value. I have discussed the myth of the declining purchasing power of the Dollar in a previous post (here) but I prefer to dismiss the idea with the cynical question “how many cellphones could your dollar buy in 1980?” The purchasing power of the dollar varies against certain items based on the supply and demand of those items and other factors.

To make my argument I created the following chart. The numerator is the Median Weekly Earnings of Wage and Salary Workers 16 and over. The denominator is the dollar price per ounce of gold.

Data from the St. Louis Fed FRED

The ratio displays how many ounces of gold you get for the median weekly pay cheque.

Maybe this explains the market current valuations. The market is discounting the coming productivity boom and subsequent wage expansion. This view would support the theory in the 2017 Trends and mentioned in the recent Viewpoint blog post about the War on Terror coming to an end with victory to the West and support the JPM chart shown in a previous post.

In summary I think this chart supports the bull case. Time is our most valuable asset and it appears to me that gold looks expensive on a purchasing power basis versus time.

I think Julian Simon would take this bet vs. the purchasing power is declining Elrich’s.

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