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Economic Cycles, The Dow, Gold and the Federal Reserve
I think that it is a fair statement to make that the manipulations of the money and credit supplies by the Fed and the US government have caused virtually every major recession since the Great Depression which was also caused by the Fed.
"On the occasion of (Milton) Friedman's 90th birthday, Ben Bernanke (the current Fed Governor) remarked: ""I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Through the IMF the Fed has wrecked the economy of country after country primarily by wreaking havoc with natural economic cycles which according to mainstream economists are pathological things which the economist must squash for a country to prosper.
The truth is that economic cycles are the living breathing heart beat of capitalism and that it is the distortions of these natural economic cycles by the manipulation of the supply of credit and money which mainstream economists pass off as “economic cycles” which are pathological. Their inflationary policies have not "cured' economic cycles they have only masked them and in doing so they have masked the harmful effects of their policies on the economy which can only be seen through cycle analysis of the data.
Here is what the Dow Jones Industrial average looks like uncorrected and corrected for inflation. No periodicity is apparent until one transforms the data to constant inflation adjusted dollars. We will examine this data corrected for population size later on in our analysis.
It is often asserted or suggested that there is only one “business cycle” which is controlled by the Fed which Wall Street investors must keep their eye on. But there is not just one business cycle but many, many business cycles, often with different periods which run counter to other business cycles (see "Cycles: The Science of Prediction" on this page).
Economic cycles are driven by supply and demand which are mutually evocative inverse forces just as light is propagated through space by mutually evocative inverse electric and magnetic fields.
Supply creates its own demand and demand creates its own supply just as the electric field creates the magnetic field as it collapses and the magnetic field creates the electric field as it collapses.
But unlike the dynamics of light, economic activity is a conscious activity. The only way that a business can gage the demand for its product is by what price it can fetch in the marketplace. The only way that consumers can determine how much money they should spend on a product is its price.
When all prices rise in concert regardless of the laws of supply and demand and of the position of each respective market in its cycle then consumers and businesses must reassess their priorities; businesses produce less when need is relatively high and consumers consume less when supply is relatively high. In short, chaos abounds in all marketplaces and the economy becomes less efficient.
To show you what I mean, let's do a cycles analysis of gold prices and gold production over the last century or so. Here is chart of gold production from 1900 to 2010 showing an exponential trend line fitted to gold production. As is obvious from the graph the variation around the trend line is not random but has a regular periodicity.
Now if we adjust the data and the trend line so that the trend line becomes flat then we can do a cycles analysis on the transformed data to find its period.
We will fit the production figures only for the time for which the United States was off the gold standard - which is a device to flatten out periodicity of the gold cycle by adjusting the money supply.
We find a very good fit to a period of 35 years as shown in the upper graph of the following chart during the free market gold period between the years of 1973 and the present. If we project this wave back to the year 1900 we can see what effect monetary policy has had on gold production. The effect was to increase the production when a free market would have made it decline and to decrease production when a free market would have made it increase.
Now if we fit gold prices to a to the all of the gold price data based on a period of 35 years as shown in the bottom graph in the chart we can project backwards in time what prices would have been if the Fed was not manipulating the price of gold by changing the money supply. Surprisingly, gold prices seems to follow the theoretical curve based on the periodicity of gold production only with the phases reversed - prices go down when the theoretical projection of gold production increases and goes up when the theoretical projection of gold production decreases - Just as you would expect from the law of supply and demand.
Production is directly related to price. When prices go up production increases. When prices go down, production decreases. Demand is inversely related to price. When prices go down demand goes up. When prices go up demand goes down. If follows from this that the theoretical price wave should be the inverse of the theoretical production wave which, as you can see, it is.
But the despite free market in gold, and the excellent fit of gold cycle production to cycle theory the monetary and fiscal policy of the government the Fed still has a distorting effect on gold prices. The exaggerated peak in 1980 was caused hyper-inflation of that era and the exaggerated peak in 2011 was most certainly caused by the fear of the future inflation which will be caused by the of the US government and its inflation machine - the Fed.
Lacking a credible store of value in their money - which represents years of hard labor for most people - people desperately grasp at straws. They grasp at things which do not change, that do not rust or decay and that can not be taxed away. They grasp at gold.
These considerations make the use of a gold standard questionable. Why should the supply of capital be tied to a 35 year cycle? While a gold standard may be preferable to the manipulating of interest rates to control the inevitable inflation which results from an excess of government spending it is not the best solution.
If you add up all of the gold produced between 1900 and 2010 it amounts to 138,403 tons. The average price of a ton of gold during this period was $11,116,666.67 in 1998 dollars. That makes a total value of $1,538,580,000,000 in 1998 dollars. The US GDP Was $8.7 trillion dollars in 1998 and 14.9 trillion dollars in 2010 (not adjusted for inflation). So even if the US owned all of the gold in the world it would not be possible for every transaction in the US to be backed by gold except on a fractional reserve basis. The opportunities for manipulation of the money supply through gold hording would ever be present. Besides, it seems to me that gold belongs on fingers and in teeth rather than allegedly buried in a vault in the ground somewhere.
Should the economies of the world be restrained by the rate at which gold can be dug up from the ground? Should all real prices be tied to the 35 year gold cycle?
It seems to me that an "inflation tax" would be just as effective as a gold standard in maintaining the stability of the money supply while still allowing the growth of the money supply to be tide economic growth provided that there was a constitutional amendment to prevent this tax from being spent on anything - including for the furnaces used to burn the money.
Here is a cycle analysis of the Dow Jones Industrial average based on constant dollars and adjusted for population size. It is rather crude at this point but it gives you an idea of what the effect of government and Federal reserve policies have on the Dow.
As you can see the "Roaring Twenties" started roaring in 1913 when the FED was created to fund the First World War. But the war time inflation plunged the per capital Dow to its lowest value ever equaled only by the bottom of the Great Depression which was caused by the deflation caused by the Fed.
The gold had been shipped off to Germany to fund its military build up for the next world war. Under a gold standard that meant a shortage of money in the US.
"Mr. Speaker, You have heard, no doubt, of the so-called persecutions of Jews in Germany. Mr. Speaker, there is no? real persecution of Jews in Germany. Hitler and the Warburgs, the Mendelssohns and the Rothschilds, appear to be on the best of terms.
Once the Fed got the war it wanted it started printing paper again as it had planned all along. This pushed the Dow up above where it would have been had their been no war.
Effectively, what had happened was that the growth slump between 1913 and 1920 pushed up the Dow during the war years of 1939 to 1945. Disrupting an economic cycle is like squeezing a balloon. The reduction in size in one area can pop up unpredicably in another area.
Had this growth occurred where a free market would have had it occur - between 1913 and the mischaracterized "bubble" of the "Roaring Twenties" consumer goods, houses, bridges, roads, schools hospitals, personal property etc. would have been produced instead of the tanks and gunboats, and bombers which were produced during World War II - the proverbial choice between "guns and butter" as they used to call it - was made during World War I and the Depression and World War II was the result.
The slump in the per-capita Dow between 1973 and 1993 was almost as deep as the slump at the bottom of the Great Depression and the breadth the decline much greater but no great hardship was felt because no great war occurred to impoverish Americans. Americans were much better off during these 2 decades than they were between the years of 1933 to 1953 even though the Dow was on the average higher during these years. The years of prosperity and relative peace between 1953 and had made the and 1973 had made this possible.
The Vietnam war was a minor war which was in no way comparable to World Wars I and II in which the entire country had been mobilized for war production. There was talk of “guns or butter” but the bad inflationary effects of the war were delayed until the early 80s when it caused hyper-inflation and aided the spike in gold prices as money moved from the stock market into the gold market and the gold production cycle declined.
It was the Fed's policy of delaying inflation through the selling of bonds which masked the inflationary effects of the Vietnam war and the excessive government spending of the 1970s. The old adage that you must choose between guns and butter was still true despite the sneaky inflationary policies of the Fed and the US government.
They did nothing to change it. They only changed the way they paid for their wars and their wasteful spending - through delayed inflation - cheating of the American people out of the value of their money - which the worst and most deceptive form of taxation without representation.
As a pretended cure for this delayed inflation (which mainstream economists seem to be at a loss to explain) the Fed came up with the wonderful Nobel Prize winning “monetarist” strategy of crashing the economy with high interest rates.
This was Milton Friedman's idea and it was the scorn which Friedman got from his fellow economists for the spectacular failure of his policies which motivated him to spill the beans about the Fed causing the Great Depression of the 1930s.
Of course, Friedman's policies were a success for those insiders who knew what was going to happen and who positioned themselves for a takeover of the failing businesses just as the Great Depression was a source of bargain basement prices for those who knew it was coming.
The time between World War II and the onset of the "New Economy" fits a sine wave almost perfectly.
Personally, I believe that the spike in the Dow which occurred between 1993 and 2001 was due to the Baby Boomers coming of age - another war time distortion - coupled with the new computer technology.
The busted bubble - the dot com bust - was almost certainly due to the effects of the fraudulent "War on Terror" brought to us by the same people who brought us World Wars I and II on the idiotic assumption that war is "good for the economy." Usually it is good only for people who want to stay out of the hoosegow for smuggling drugs.
Living cells maintain a tight control on the concentration of Adenoside Triphoshpate (ATP) which is used in all the energy transactions in the living world. Enough ATP is always available whenever growth or some metabolic reaction requires it. There is never any inflation in the energy transactions - if there were the effects would be disasterous for the cell and the organism.
There is no reason why an economy can not function like a living organism. Indeed, the economy can be thought of as a living social organism and can studied as if it were a part of the living world of biology - which it is.
The "banks" of the cell are organelles called mitochondria which (like the banks of the nations) started out in life as parasitic organisms which (unlike the banks of nations) have evolved a symbiotic relationship with their host.
But can we really learn anything about economic cycles by studying the cycles in nature? Edward Dewey seems to have thought so. When Dewey first wrote his “Science of Prediction” book economic cycles were quite mysterious things and biological cycles are still mysterious with hypotheses abounding as to how and why they occur.
Scientists know that they are there but as yet have not been able to formulate any unifying theory. I think that the idea of mutually evocative forces - first put forward to describe the behavior of light by James Clerk Maxwell - has great potential for describing many if not all cyclic phenomena.
Any new science always goes through descriptive phase before any advances can be made as to the how and why of things. The transition between descriptive and theoretical science is often bridged by a mathematical analysis of the data. Scientific laws can be described by mathematical relationships which transcend the different fields of science.
For instance, the equation to describe the growth of plants (Y) with increasing multiples (ln2/h) of fertilizer (X) up to a maximum growth yield (A)
Y = A(1 - e-(ln2/h)x )
is essentially the same as the equation which describes the increase in the potential of a capacitor (Vc) with increasing multiples (1/T) of time up to a maximum potential of E.
Vc = E(1 - e-(1/T)t )
Plant physiology is not electronics but the mathematic relationship between the growth of plants with increasing quantities of fertilizer is analogous to the mathematic relationship between the increase in potential across the plates of a capacitor with the passage of time.