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Robert Lambourne: Larry Summers' new study finds inflation is as bad as in the '80s

Section: Daily Dispatches

But today's U.S. debt burden is far worse, and so interest rate increases are far more dangerous.

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By Robert Lambourne
Saturday, June 18, 2022

This month the National Bureau of Economic Research, based in Cambridge, Massachusetts, published a study titled “Comparing Past and Present Inflation":


One of the study's three authors is former U.S. Treasury Secretary Lawrence Summers, a professor at Harvard University, who is well known to GATA followers as the joint author of the obscure economic study published in August 1985, "Gibson's Paradox and the Gold Standard":

... Dispatch continues below ...


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A reasonably comprehensive summary of how the latter study fit into the government policy scheme to suppress gold prices is available in my report published by GATA six months ago:

Extracts from this summary are used here to highlight the principal modern reason for controlling the gold price. This reason was first examined outside official channels by GATA consultant Reginald Howe, who produced a report about it in 2005: 

Gibson's Paradox was the observation that the price level and nominal interest rates were positively correlated over long periods. In essence Summers' study on Gibson's Paradox claims to have found empirical evidence of an inverse relationship between the real price of gold and the real interest rate, a relationship that was examined by the authors over long periods that both included and excluded operation of a gold standard. 

Essentially Summers' study suggests that lower interest rates are correlated with higher gold prices. This implies that if gold prices are surreptitiously suppressed, with financial markets unaware of the suppression, the market comes to believe that interest rates are sufficiently high, making it much easier for monetary authorities to maintain lower real interest rates. 

In Howe’s study is a chart suggesting that around 1995 the Gibson relationship between gold prices and interest rates broke down and this seems to have been the result of a policy decision by the U.S. monetary authorities. 

Perhaps not coincidentally, Professor Summers was deputy Treasury secretary at the time. 

GATA has collected more evidence that since the 1990s gold prices have been suppressed by way of gold leasing by central banks and the use of gold derivatives, plus the occasional dumping by central banks of physical gold. This period has coincided with a sharp fall in both nominal and real interest rates. In GATA's view these low rates are the main objective of the gold price suppression policy followed since the 1990s.

The main interest in the new NBER study for monetary metals investors is the conclusion it draws about the present rate of inflation -- that present inflation is far closer to the rate reported at the time of the monetary squeeze imposed in 1979 and the early 1980s by the Federal Reserve under Chairman Paul Volcker. 

This NBER study's conclusion is based on work done to recalculate, using present methods, the Consumer Price Index as it was reported in the 1980s.
That the current formula of calculating the CPI produces much lower rates of inflation than the formula used 40 years ago is well understood by many gold investors. For example, the internet site details many changes made to the calculation of official consumer price statistics to reduce the level of reported inflation from what earlier formulas would produce:

The recent NBER study suggests that the originally reported core CPI in June 1980, 13.6%, would have been only 9.1% using the current formula for calculating the CPI. This compares to a core CPI of 6.0% reported in May this year. 

Consequently the study concludes “that to return to 2% core CPI today, we thus need disinflation of a similar magnitude as Chairman Volcker achieved."

In commentary on the new NBER study published this month by The Guardian --

-- the newspaper's economics editor, Larry Elliot, wrote:

"The shock treatment administered by Volcker in the early 1980s resulted in official interest rates nudging 20% and the unemployment rate hitting a postwar high of 11%."

Recent mainstream economic comment has suggested that a much lower level of nominal interest rates would be sufficient to bring the CPI down to 2%. But if the new NBER study is correct, this will not be nearly enough to cut inflation to 2% and interest rates will have to rise much higher. 

Given that federal government debt is now in excess of $30 trillion, increasing short-term nominal rates to around 20% would have a disastrous impact on debt-funding costs. So it seems safe to conclude that policymakers would have to work out some way to devalue the debt, perhaps with some sort of debt jubilee or vast monetization of the debt by the Fed.

The new NBER study seems to be a reluctant recognition that the period of substantial government borrowing at low interest rates is over. As a result, much higher monetary metals prices may be expected with the dollar declining substantially in value. The years of gold price suppression seem likely to lead to the gold price in dollars rising to very high levels.

Regrettably, this suggests that outlawing the ownership of gold remains a distinct possibility.


Robert Lambourne is a retired business executive in the United Kingdom and a GATA consultant.

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PDF icon NBER-Summers-June2022.pdf2.44 MB