Reverse Mundell-Tobin Effect Epiphany!

Four years ago I wrote about the Mundell-Tobin effect. Time to revisit it.

January 20, 2011
Mundell-Tobin Effect Epiphany!

From Wikipedia:

The Mundell–Tobin effect suggests that nominal interest rates would rise less than one-for-one with inflation because in response to inflation the public would hold less in money balances and more in other assets, which would drive interest rates down.

This is what its reverse would look like.

A reverse Mundell–Tobin effect would suggest that nominal interest rates would fall less than one-for-one with inflation because in response to less inflation the public would hold more in money balances and less in other assets, which would drive interest rates up (relative to the low level one might expect).

That was certainly true of the hard asset known as silver. As seen below, I was definitely not bullish on the metal in 2011. This is just one more reason that silver investors couldn't keep the parabolic move to the upside going.

And as for interest rates being driven up, well, the Fed wasn't going to let that happen if they could plug the hole, which they did. They were in no mood to come to silver's defense though. Go figure.

Silver. Rug. Pulled. Out from under.

February 24, 2011
Silver Bubble Construction Set

If these charts have any merit, then silver is either in a bubble or silver has priced in a great deal of future pain for savers. Perhaps hindsight will show that it was a bit of both? It's just one more reason I've been willing to buy 30-year TIPS.

In hindsight, it was more than a bit of both. Silver investors were crushed, short-term savers got more of the same (ZIRP), but investors in the 30-year TIPS have been well rewarded.

Being a permabear is never easy. One must always try to figure out just what kind of bear to be. I am not even close to being a "Shadowstats Hyperinflationary" bear, but rather a "Slowly Declining Roman Empire" bear. There's a huge difference, to say the least.