Julian Van Erlach

How Does Deflation Actually Happen?

Banks do not simply create money as described. Otherwise, net worth or capital could suddenly be created by granting a loan:

Deposit: $10; followed by $90 in new loans thus maintaining a 10% fractional reserve. The balance sheet would now show $90 in new assets (loans) and $10 in liabilities (deposits); with net worth up $80. This is not the case. Bank must borrow $90 to grant $90 in loans and generates net worth growth through profit: ROA - cost to service debt, deposits and operating costs.

The Amazing Dollar - Gold Correlation

Please Google: The Price of Gold: A Global Required Yield Theory - paper published in Jrl of Investing, Spring, 2005 - explains how gold is priced and why FX rates affect it.

TIPS: Nominal Yield, Risky Real After-Tax Return

Dear Greg,

Consider that the UK consol during the entire pure gold standard 1820- 1910 - through depressions and wars, exhibited a constant real yield (my article on gold). Supply and demand for long term capital would seem to only clear when both sides agree that the maximum real return after tax that can be earned/paid is ...real per capita productivity growth.

TIPS: Nominal Yield, Risky Real After-Tax Return

Dear Jim - good thoughts. Consider that if untaxed investors were the marginal pricers e.g. charities, foundations - then the current 10 year TIPS yield of just above 2% would be a REAL yield; thus reflecting the required real no tax/after-tax yield. Then the nominal bond should be priced with the same 2% real after-tax yield. However, the real nominal bond after-tax yield based on implied expected inflation is just .5%. This seems to indicate the marginal pricer of both TIPS and nominal bonds is factoring taxation.