Macroeconomic Cycle Made Visible in Real Terms as Protection against Asset Illusion

Uwe Bergold

doi:10.18267/j.aop.614

Abstract

The current historically unparalleled global debt crisis and the resulting momentous valuation anomalies notably affecting the stock and bond markets (the historically low-interest rate level) are making it increasingly difficult for both institutional and private asset managers to generate an actual yield above the inflation rate. The problems with building wealth, and hence with pensions plans, first began at the turn of the millennium when the burst of the largest stock market bubble of all time firmly put the price distortions of assets into the public eye. This milestone also marked the beginning of a secular bust phase, which has been on a real gradual downtrend and despite nominal price increases is still ongoing today. However, this problem only becomes visible upon real evaluation, in ounces of gold. Contrary to the ubiquitous nominal view in uncovered paper currencies, only this real view, valued in ounces of gold, protects both private and institutional investors from an illusion of wealth.

Highlights

Relentless expansionary monetary policies, i.e., overly low interest rates for overly long periods, have led and will continue to time and time again lead to macroeconomic boom and bust cycles
The market’s “natural credit squeezes”, i.e., a currency backed by gold and commodity credit lending – the use of savings for a loan – went out of style decades ago
It is the supply of ever more excessive bank circulation credit to the national economics, above and beyond the commercial banks’ deposits, which leads to the recurrent economic boom and bust phases (Mises, 1924)

Summary

Introduction

Relentless expansionary monetary policies, i.e., overly low interest rates for overly long periods, have led and will continue to time and time again lead to macroeconomic boom and bust cycles. The market’s “natural credit squeezes”, i.e., a currency backed by gold and commodity credit lending – the use of savings (customer deposits) for a loan – went out of style decades ago It is the supply of ever more excessive bank circulation credit to the national economics, above and beyond the commercial banks’ deposits, which leads to the recurrent economic boom and bust phases (Mises, 1924). A look at the rates for fixed-income securities, the bond market, shows a momentous bubble characterised by historically low interest rates (Shiller, 2015) This means that even the bond market will not allow the generation of real earnings in the future, no matter how badly the financial intermediaries need these earnings for building wealth and retirement plans for their customers. This real consideration (e.g. by valuing asset classes in ounces of gold) protects both private and institutional investors from an asset illusion

Monetary Units of Measure – Nominal versus Real Valuation

Visualisation of the Macroeconomic Cyclical Fluctuations

Validity of the Watershed Points in Cycles for Future Earnings

Approaches to Explaining the Cyclical Fluctuations on the Macro Level

Findings

Summary