[kbxcoop]

I should have clarified and said it wasn’t really a general rule, and that gold doesn’t always go up with interest rates, that was my bad. My observation is that gold sometimes go up with interest rate hikes, and sometimes it doesn’t. But I do not really see the opposite happen that much at all (where the price goes down). The argument I hear is that the opportunity cost to hold gold goes up as interest rates rise, but that doesn’t seem to be the case, and there are cases where it seems gold goes, even when the spread between interest rates and inflation increase (real interest rates increase). The argument makes sense when it comes to gold as a consumer good, where if rates were to rise, people would save more and demand less gold. But it looks like the reason that gold doesn’t seem to drop all the time when rates rise is because a portion of demand for gold seems to come from a function of a medium of exchange, so people hold gold to sell later to buy dollars instead of actually holding dollars itself.

[kbxcoop]

In the financial media, I noticed that people tend to say that gold goes down when interest rates rise because the opportunity cost of gold goes up. What I’ve seen is that the opposite tends to occur. When the Fed raises rates, gold goes up. Why does this occur?

[kbxcoop]

During the 50% sale, I bought Roger Garrison’s “Austrian Macroeconomics: A Diagrammatical Exposition”. The entire model makes sense, except that he gets into the part about the demand for money vs the shift in the curves. From my understanding of the graph, he aggregated the supply of present goods vs the demand of present goods throughout the entire economy. He gets into explaining (pages 22-23) that a shift in the demand for present goods must correspond with a shift for the supply of present goods with no change in the demand for money.

My understanding is that the Demand for present goods (DPG) and the supply of present goods (SPG) is that it can only come from its reciprocals (the demand for future goods (DFG) and the supply of future goods(SFG)). I can only DPG in the time market if I SFG, and I can only DFG in the time market if I SPG. From our discussion above, it makes sense that money demand cannot affect the interest rate, and that prices will adjust to the demand and supply of money, so the affect of the time market from an increased demand of money, all else equals, does not change except for the prices of consumer/capital goods. So is Roger Garrison wrong on this point? Is he mistaking the allocating of resources from consumer goods as present goods in the time market?

What are your thoughts on the model (pg 23)? The usual models I have seen in graphical form is something like https://mises.org/library/marginal-efficiency-capital on Figure 9, with using the Production Possibilities Frontier. Garrison’s model seems better at incorporating the use of time in production (Aggregate production time, increased capital investment increases time, all else equals) and does a good job at showing that the Keynesian consumption function doesn’t make sense.

Thank you for taking the time to answer my tedious questions, but I want to make sure that the reasoning is sound, and that I myself can understand why it makes sense. I don’t like reading about stuff and taking it face value, I like to go through the reasoning so I can draw my own conclusions/defend the logic.

[kbxcoop]

So in the ERE, the yield curve would be flat?

[kbxcoop]

Why is there a lot of talk about the yield curve? What is it? What does it mean?

[kbxcoop]

During the boom part of the boom bust cycle, we understand that profits due To monetary inflation causes capital consumption. During the boom part, some prices are going up faster than others. For example, prices of houses went up faster than the price of cars. In this scenario, since resources are being drawn to the housing market, and less resources are being drawn to the car industry, would there be more capital consumption in the housing market or car market?

[kbxcoop]

After a little bit of thinking of the example above, it finally clicked. When people demand to hold more money, the PPM goes up, therefore people can buy more consumer/producer goods. Since consumption went down (90-81) more than investment (10-9), prices of consumption goods fall relative to the rise of value of money, therefore the price spreads between present and future goods would be the interest rate.

[kbxcoop]

I think I am missing something that just isn’t clicking.

Let’s assume this. If I have 100 ounces of gold, and my time preference ratio is 10%, and I have no demand to gold money, my allocation would be 90 consumption 10 saving- investment. If I were to demand more money, say 10 ounces, my allocation would then be 10 ounces to gold, 81 consumption, and 9 investment. What I dont understand is that how can the interest rate stay the same (10%) when the demand of overall present goods went up. So now, there is only demand of 9 ounces for future goods, and 91 ounces for present goods. So I think the problem I am having is seeing the difference between if someone were to a) consume 91 and save 9, and b) someone holding 10 ounces, consuming 81, and saving 9. Between these two scenarios, to me it doesn’t make any sense how the interest rate between a and b can be the same. Am I completely over thinking this?

[kbxcoop]

I’m confused on this point. If time preference is the ratio of present to future goods, and cash holdings are a present good, wouldn’t the only way to keep that ratio the same is for cash holdings to only come at a decrease of consumption. Am I confusing the nature of cash balances and savings? Is it because cash balances are used for future purchases?

[kbxcoop]

So would it make sense to say that cash balances are present good, and that, if time preference doesn’t change, that additions to cash balances can only come from a decrease in consumption?

[kbxcoop]

I’m sorry, I forgot to link the article.
https://mises.org/library/demand-money-and-time-structure-production

The article states that, atleast what I got from it, is that, when the demand for money rises, the price of all inputs in the economy fall. When demand shifts from land lines to cell phones, the input prices of the land lines falls relative to the increase of prices of the inputs to cell phones, because the price of outputs change relatively the same. When money demand increases, however, the input and output prices of everything else falls, and the input prices for money falls, so resources must necessarily flow into money creation. Therefore, that spread between input and output of everything else in the economy must widen in order to “shrink” or reduce the spread of the inputs and outputs to money creation. Correct me if I am wrong please.

[kbxcoop]

I was recently learning about the IS-LM Curve, and when I read about how increased Real GDP (Y) increases the demand for money in the economy, and therefore increases the rate of interest, I became curious if the demand for money actually did increase the pure rate of interest. Reading through Man Economy and State, I noticed Rothbard said that it did not affect the pure rate of interest. I then read an article on Mises.org (The demand for money and the time structure of production), and the conclusion was that the increased demand of money increased the pure rate of interest. So I have a few questions:

1) When it comes to the Keynesian LM relationship, is this relationship, and the reasoning, plausible?
2) Looking at time preference, and looking at the ratio between present and future goods, Murray says that when people add to their cash balances, the left over income still has the same proportion as before (ex. 100 oz income, with 20% saved means 80 Is consumed, 20 is saved, and if cash balances was increased by 20, 64 is consumed and 16 saved). The author of the article states that the pure rate of interest increases due to the fact that, since money is now more valuable in relation to the costs to produce it, that more capital and labor is pulled from other investment projects and put into money production (assuming commodity). So a couple of questions:
1) Aren’t cash balances present goods? If they were, wouldn’t it make sense that cash balances are only pulled from consumption, so that the pure rate of interest and rate of investment is the same in society?
2) Who is right here? Are they both wrong in their conclusions?

[kbxcoop]

2. So specifically why does the structure of production lengthen? I understand that resources are diverted to higher stages of production because the NPV of the projects are now profitable, but what does it mean to lengthen it? Talking about the example, you said resources must be diverted to expand production capacity. So does the lengthening of the capital structure mean to divert resources to projects that will take time, but increase production in the future?

4. For this, I mean would interest rates have to rise for a bust to occur? Could the Federal Reserve (assuming there isn’t too much inflation) be able to hold a certain interest rate down forever (assuming we never get the crack up boom)? If a bust would still occur, how so?

5. After reading Joe’s and Murphy’s article (from 2008), I do have another question, and forgive me if you did say this in one of the lessons (I will go back to watch if you did). It’s about capital consumption. How does it occur under illusory gains? In Murphy’s article (The Importance of Capital Theory), he talked about how resources (labor), in his example of the island, are not put to maintaining capital. In Joe’s article, he said: “On the real side, the increase in the prices and profitability of consumer goods diverts factors from higher stages to consumer goods’ industries, thereby restricting the supply of resources available to add to or even replace the stock of capital goods.” So if entrepreneurs must maintain capital, why aren’t they doing it? And if the supply of resources are being restricted to add or replace capital goods, wouldn’t the prices of capital goods far surpass the industries’ profitability?

Thank you for taking the time to answer my questions. I might be confusing a few things, but I just want to make sure I fully understand how the business cycle works.

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