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The origin of cycles

wealth.goldmoney.com / BY ALASDAIR MACLEOD / FEBRUARY 16, 2017

It was Karl Marx who was among the first believers that cyclical behaviour was endemic to free markets.

He lived through a time when there was a regular cycle of boom and bust, with phases of economic expansion followed by contraction. Workers were employed and then unemployed, and the only way this could be stopped, in Marxian economics, was for the workers to acquire the means of production, or more correctly, the state to do so on their behalf.

Other economists, such as Jevons and Wicksell, recognised the possibility of long-term fluctuations in commodity prices, but they did not formalise them into cyclical behaviour. Since Marx’s vision, several cycles have been identified, some of which go in and out of fashion. Groundwork on long-term cycles was conducted by the Russian-Marxist Nikolai Kondratiev, who identified a long wave cycle of 45 – 60 years, and by Joseph Schumpeter, an economist of the Austrian school, who identified several overlapping cycles, drawing on the work of others, such as Juglar (7-11 years fixed investment) and Kitchen (3-7 years fixed inventory)i. The American economist and father of gross domestic product, Simon Kuznets, reckoned there was a 15-20 year cycle of infrastructure investment.

Additionally, and more recently, cycles in human behaviour have been attributed to sunspots and other phenomena. Since the 1980s, computer aggregation of data has allowed technical analysts to devise proprietary systems for forecasting cycle-driven price events. Cycles are big business today, fuelling an unprecedented public participation in securities markets, today’s destination for savings, and the media for wealth management.

Accurate price data are not generally available from the time before commodity markets were properly established in the nineteenth century. Reliable data on commodities only really dates from about 1865, some time after global commodity trading had become established and people began to record historic prices. Modern data collection, the basis of GDP and consumer price indices, dates from the 1930s with the commencement of national accounting. Therefore, extrapolation back in time, particularly for evidence of long-wave cycles, requires a leap of faith to replace hard evidence. Therefore, the only way to identify their origin and validity is to consider the subject on a sound aprioristic basis. The intent of this article is to explain the phenomena that give rise to business and economic cycles, demonstrating they can only be the result of unsound money.

The sound money hypothesis

Sound money is defined as physical gold, or fully-backed substitutes redeemable in total for physical bullion. It is a condition that has never occurred with fractional reserve banking, which formally dates from Peel’s Bank Charter Act of 1844, because that legislation permitted banks to create credit money not backed by bullion. Furthermore, a note issue monopoly was granted to the Bank of England, partially backed by government debt, though subsequent note issues had to be gold-backed. Therefore, money and credit in issue were far from sound.

Before 1844, sound money was also compromised, with gold convertibility of banknotes suspended by the Bank of England in February 1797, and only resumed in 1821. Between 1821 – 1844, country banks issued their own bank notes, and there were periodic failures, the result of over-issuance of these liabilities relative to bullion and genuine claims on bullion in the banks’ possession.

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