If I see that the complexity of the financial system is more than I can explain with a simple theory, or cannot predict then I understand its complexity. I just cannot resolve its operation by a simple model that will allow prediction of trends. One one knows causes, and percentage importance of factors, one could model the effect of those causes and the trends would have to show, no matter the complexity.
There is one aspect of the financial system that you are intending is per force ad hoc, is that its time element does not allow one to define the exact causative factors of let us say, inflation for instance. We can say that scarcity, supply-demand (consumptrio/replacement) changes, interest rates and loan polices, greed (hoarding) and the like are all factors, but are the the only or most operative factors?
And do they explain with any model what will be the cause of economic cycles or are they changeable in importance with different types of economies and times?
What if I were to say that interest money is the only root cause of true inflation? In fact this has been suggested by economists, that the expression of money's time value with any rate of interest will guarantee inflation. It may not be the only thing that will cause it, but it will guarantee it. So is there any way to eliminate it? Is it a necssary evil that just expresses nature's flux like the cycle of starvation of the animal kingdom and the elimination of the species. It may be that man has to accept the flux of boom and bust as it is nature's way. Change must take place. Stability is the enemy of survival.
But can we know what these causes are? It is said that we know what the causes of weather are, all we need to know is the minutae of the myriad causes and a way to enter them into calculation. We just need to plug the numbers and wait for an answer.
In addition we may actually know the reason things rise in price and the pressures, it is just that the interrelation of all those things is a horde of detail too hard to nail down and the programs that would map the effects would be far too complex for today's machinery. In other words there are too many variables to enter and the equation is a bit hazy as well. Equations with 30,000 independent variables and 200,000 equations lines are hard to figure, even if the desired dependant variables are few.
On the other hand, it is an information flow problem. Shannon, the father of info theory said that he could solve it. In one famous foray into the stock market in the 1950's he was supposed to have made about 500K in about 6 months. If this is true and he says it is, then there is way to predict the trends. The trouble is it would change speculative behaviour if everyone used the program. Suckers would disappear unless the information flow was hid, which in the case of gold and market prices on time, it definitely is.
It has been suggested that digital signal processing has powerful predictive methodology based on Shannon's theories that can in fact predict trends if you have sufficient information. Programs are out there that will allow very good curve trend fitting.
In 1977 I used a primitive form of non-linear regression to predict the price of gold 7 years ahead in a paper I wrote at the time. I thought that it would reach a price of 484 dollars. To within about two or three dollars and a few weeks, it did indeed reach that price. It was at that time about 75 dollars. there were two benefits to this method at this time. There was a recent free market in gold started by Nixon, and the gold producers were not yet geared to large scale production having come off a long hiatus. As well, the long term historical price swings of gold favour cycles of that length. In short, gold had a tendency to move in about 7 to 10 year cycles with great stability. Once it is started on an upward or downward leg, it is like a roller coaster.
At the time I made the 1977 prediction it had been on a one year rise. The economy was not depressed, was inflating rather briskly, and economic outlook was uncertain. Jobs were scarce. Canada was doing rather well in relative terms because metal resources were not yet drugs on the market. Prices were stable.
We are in a somewhat different situation today. Producers are geared up for high production, production of gold is just about at an all time high except in Canada, and inflation is not in the cards at present in goods at least. We are in a deflationary period it would seem, as we have been through a time of excess demand and consumption of paper. Nevertheless there are similarities with 1977. For one there has been a pronounced period of perceived low gold price. This would correspond with 1930 to 1974. There is also a period of inflation of value, in stock prices if not in commodities. Remember not all bubbles are the same things. Tulips were the greet inflator of one time gone by. Stock price soared in the late 1920's, yet household prices were bearable.
What we have is a very good analog of 1930. So did gold price rise then? Should it? Is it money in fact? What we hear from many, is that Roosevelt fixed gold at 35 dollars in 1934 from a lower price, thereby devaluing the dollar, and raising gold's price, all at once.
But that is not factual. In fact Roosevelt waited for gold to rise by itself to 35 dollars before fixing it. In 1929 gold was $20.67 cents. In 1934 it was 35 bucks. It went there on its own. Why? Because in a time of little money, gold being perceived as money, bought money. Therefore the price rose of gold as it could be used for money.
In fact devaluation took place naturally as prices fell after 1930. Roosevelt had nothing to do with it. Fixing the dollar was done so it would not fall any more. It was to firm the dollar up, not drive it down, that he fixed gold.
Gold has always had use as a monetary commodity, so in fact the propaganda that it is not money, or just a commodity is moot. At best it is wishful thinking. If it is not money in any way, neither is a silver coin, or a paper dollar. In fact they are not. They are currency notes issued in lieu of metal of relative accountable value, or as debt of uncertain value. They are not money. Money is credit, not debt. A fine line as one must balance the other, but dollar bills are definitely debt, no one would say otherwise.
All the government and bank shenanigans in gold are attempts to float or repair currency. There is no problem with gold. It has plenty of buyers. Otherwise they could not finance the buying of gold forward by selling gold. In fact friends of the banks sell equal gold to the gold they buy. This doubles the gold sales on record and drive the price down. Why gold sales are not registered as gold buys I leave to the reader as an excercise.
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