It bottomed in early 2016, which coincided with the low in the Continuous Commodity Index (see Chart 7).


According to modern central bank mythology, if the price of real stuff measured by the CPI rises (above the targeted 2% level), they need only raise policy rates by a handful of 0.25% increments for inflation to be brought under control.


“Easy peasy.” One problem with this is that history suggests that consumer prices and interest rates tend to rise simultaneously for extended periods.


In the current circumstances, this could “blow-up” the bubble in the bond market which, in our opinion, is a bigger bubble than the equity market.


Correlations between consumer prices and interest rates bring us to a subject which has been largely forgotten by mainstream economics…


Gibson’s Paradox. Long-term data shows that consumer/wholesale prices and interest rates have tended to rise and fall together, although the relationship has changed slightly (see below) since the collapse of Bretton Woods and the permanent adoption of floating currencies.


The simultaneous rise in prices – please note that we are referring to the price level not the rate of inflation - and interest rates is known as “Gibson’s Paradox”. It was first mentioned by Keynes in his 1930 publication, “A Treatise on Money.”


In an academic paper, “Gibson’s Paradox and the Gold Standard”, Larry Summers and Robert Barsky commented (with our emphasis).


“Monetary theory leads us to expect a correlation between nominal interest rates and the rate of change, rather than the level, of prices. Yet, as emphasized by Keynes (1930), two centuries of data do not confirm this expectation... Keynes referred to the strong positive correlation between nominal


8) Source: Bloomberg


21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0


Index of Consumer Prices Long-term Interest Rate (%)


6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00%


Please note: the above chart uses annual data.


interest rates and the price level, which he called ‘Gibson’s Paradox’ as ‘one of the most completely established empirical facts in the whole field of quantitative economics.”


If a positive correlation between interest rates and prices is an established empirical fact, perhaps a reassessment of central banking is (more) overdue.


7)


In our long-term analytical framework, we break down the last 230-odd years since 1788 into four long economic (Kondratieff) cycles. We are in the eighth or ninth inning of the uncompleted fourth cycle.


The most clear-cut example of Gibson’s Paradox in operation was during the third long economic wave during 1897-1933 as we define it (see Chart 8).


26 | ADMISI - The Ghost In The Machine | January/February 2017


1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933


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