Friday, April 20, 2007


This paper appearing on Financial Sense University deserves serious attention. For one thing it doesn't for a moment indulge in any of the prevalent nonsensical theories of money as 'fiction', 'signs', 'symbolic' etc. In doing so it reasserts the distinction between price and value and correctly identifies gold as the money commodity. One had thought such clarity had died with Classical Political Economy.

The demonstration is accomplished by a series of elegant charting exercises which begins by considering the Dow 1997-2007 which of course is denominated in Dollars. However, "Since January 2002 the dollar has plummeted 31.25%, versus other currencies. This has caused money (gold) to rise measured in currency (dollars) as more and more investors move out of their currency and into real money."

A series of charts is then presented which show the Dow in Gold, Silver and a selection of different currencies. But it is those charts that show the Dow in terms of the values of several commodities, viz. the Commodities Index, Copper, Crude Oil, Industrial Metals and Food that are my favorites.

Part II of the paper critiques the official measurement of CPI where we find another uncommon appreciation of the nature of money; "The true definition of inflation is an expansion of the currency supply (incorrectly referred to as the money supply… currency and money are very different things…)" In carrying out this part of the analysis reference is made to the Fed's action in ceasing the publication of M3 and the significance of this move in masking real inflation. Considered together with the contemporary suspension of the publication of repurchase agreements (RPs) the conclusion drawn is that, "... now the Fed has hidden one of the methods used to inflate (Repurchase Agreements), and they have hidden the measurement that would reveal this inflation, (M3)." Real inflation over the period considered is calculated in the order of ~ 60%.

Constructing the missing M3 figures from other data claims to show that, "there is now 70% more currency in the currency supply today than when the Dow peaked in 2000. This means that today the Dow would have to be above 20,000 to be in positive territory."

Do yourself a favor; read the full article.