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Ian R. Campbell  -  Mar 17 12:17 PM 66 Posts 1 Follower 0 Following
Gold Hotelling?

A title of a recent article 'Protected: Gold, Infinite Debt, and the Problem of Capital Storage: Has The Hotelling Moment Arrived?' - reading time 5 minutes - is for me a 'play on words'.  The author of this article is Gregor Macdonald, who often writes in Seeking Alpha, and who I think is one of more thoughtful contributors to that website.

Harold Hotelling (1895 - 1973), a University Professor (Samford University, Columbia University, and the University of North Carolina) was a statistician and economic theorist.  In 1932 (in the middle of the Great Depression) he proposed "that a rational producer of resources would only be inclined to extract and sell that resource if the investment opportunities available with the capital proceeds where greater than simply leaving that resource to appreciate in the ground".   Macdonald questions whether the the fact that compound annual growth rate ('CAGR') for physical gold production has been negative after 1999, when it was 3.8% for the twenty year period 1980 - 2000, means that gold producers (or at least some of them) in the past ten years have made a conscious decision to leave gold in the ground in expectation of higher prices or other 'opportunity cost of capital' rational, as contrast with extracting it in that period.  One might, tongue in cheek, wonder whether Macdonald is equating this to leaving 'gold in the hotel' (ground).

Macdonald also quotes from a 2009 New York Times essay on the connection between debt limits and energy supply.  I suggest you read the following quote from the work of Frederick Soddy (a 1921 Nobel Laureate) carefully, determine whether you agree with what Soddy said, and then consider how applicable you think his views are to the current economic situation many of the developed countries find themselves in:

"Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment - and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.


Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation - stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets."

Macdonald has written what I consider to be real 'food-for-thought' article.  I strongly suggest you take the time to read it.

Topics:   Gold Hotelling, Gold, Capital Storage, Debt
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