Before I lay out my macro thesis I would like to draw your attention to Mr. Karl Gustav Cassel, a Swedish economist, professor at Stockholm University, and my inspiration for this thesis.
Cassel, who is known for his notable contributions to the theory of Purchasing Power Parity, is also one of the only economist who rightly predicted the depression that we all now famously know as The Great Depression.
Anyone interested in understanding Cassel’s hypothesis on the depression of the 1930s should read: ‘ANTICIPATING THE GREAT DEPRESSION? GUSTAV CASSEL’S ANALYSIS OF THE INTERWAR GOLD STANDARD’, a paper written by Douglas A. Irwin and published by National Bureau of Economic Research. Please click here to read the paper.
Summarizing Cassel’s idea, circa 1920: If the value of a state’s currency (a liability) is fixed to the price of Gold (an asset), whose supply the state cannot control, then as the net supply (supply minus demand) of that asset fluctuates the prices of all domestic goods priced in that domestic currency will fluctuate as well. Should the net supply of that asset decrease substantially, say through an excessive increase in demand or an excessive disruption to supply, then the value of all domestic goods priced in that domestic currency will fall substantially causing a deflation to occur within that state. The most effective way for such a state to combat its deflationary headwind would be for the state to allow the price of gold relative to its domestic currency to adjust higher.
Applying Cassel’s idea, circa 2016: Please click here to continue…