EC Global Inflation Watch

Instead of linking production and consumption through Say’s law, Keynesians imagine a decline in consumer demand due to rising unemployment releases unused production capacity. Understanding this error explains another phenomenon: in a contracting economy people will not increase their cash and deposit balances at a rate to match the expansion of the money supply. Being poorer from the wealth transfer to government through monetary inflation, people tend to reduce their money balances. This alters their money to goods preferences to the detriment of the money’s purchasing power, while more money from the central banks floods the markets.

The reason asset prices rise, followed by those of consumer goods, is a reflection of this desire not to increase money balances, and inevitably, then a tendency to begin reducing them takes hold. Today, this explains the rise in cryptocurrency and equity prices relative to fiat money, driven by the cohorts that are first to ditch a currency which is depreciating relative to their perceptions of financial security.

The Keynesians’ reference point was the appalling depression of the 1930s, which they blamed on gold. With gold, prices fell bankrupting farmers, other businesses and the banks. But farmers with their new tractors increased grain output around the world, the glut driving prices lower for nearly all foodstuffs. At the same time the banks ended a period of credit expansion, withdrawing loans from businesses, creating the usual cyclical slump. The difference from previous slumps was intervention, first by President Herbert Hoover and then by Franklin Roosevelt. It was the prototype Keynesian intervention that prolonged the slump, not the gold standard.

The misunderstanding of inflation-supporting economists and subsequent distortions of the historical truth about the depression have led the economic establishment to fully embrace inflationism while condemning the deflation of prices as an evil. Again, this flies in the face of historical fact, because prices fell throughout the nineteenth century, improving the living standards of everyone and allowing the purchasing power of their savings to grow. Hard work and innovation were rewarded, while by permitting free markets the government let it all happen under a working gold standard.

One can only suppose that the unadmitted purpose of inflationism is not to improve the prospects for the ordinary individual but to enhance government revenue. That is certainly the outcome of macroeconomic beliefs which condemn deflation.

The case for gold as future money

Some of the reasons commonly put forward denying an inflation problem are notably fiat-centric. For example, a claim that the rise in cryptocurrencies and equity markets are speculative bubbles and not indicative of monetary instability. There is almost certainly truth in this, with a large element of investment always dedicated to trend-chasing rather than founded on reason. But those that take the view it is only speculation fail to get the signal, that what they might describe as unwarranted speculation is an early warning of the consequences of monetary inflation. These are the financial commentators who fail to realize that of any form of money, only sound money can truly reflect a sustainable objective value.

This brings us to metallic money, the gold and silver to which people have always defaulted when kings, emperors and governments fail to sustain their unbacked alternatives. In Figure 1 silver has been included in the commodity category, because with the gold/silver ratio at roughly 77 times it is not being priced for its monetary qualities. That may change. Until it does, we should consider the position of gold as the ultimate money while silver remains priced as an industrial metal, a situation that must nevertheless be kept under review. Furthermore, if governments are to stop the collapse of their currencies, that can only be done by mobilizing central bank gold reserves to back them, or alternatively by linking their currencies to another which is fully convertible into gold at every holders’ option.

Apart from other significant hurdles, those who believe that cryptocurrencies will replace gold when fiat dies have the problem of explaining how bitcoin and other cryptocurrencies will be sanctioned as money by governments which have none in their monetary reserves. Instead, they are currently designing their own central bank digital currencies, through which, they hope, they can control economic activity and ultimately prices. If anything, in the face of technological innovation they are spurred on by a determination to keep control of all forms of currency for themselves.

The best hope for cryptocurrencies appears to be that fiat continues to exist and like the Argentine peso, never quite die. If and when they do elapse, or at least when the planners realize their battle is lost and that to prevent a complete monetary breakdown they must introduce proper backing for their currency, then states have the power and the means to ensure sound money is available within a matter of weeks. The only sound medium of exchange they can use is what they have to hand, and that is their gold reserves. Of course, if governments fail to back their currencies convincingly or rein in their spending — necessary to sustain gold backing credibly — cryptocurrencies might have a brief extension as stores of value.

Putting the cryptocurrency issue aside, the history of collapses in the purchasing power of fiat money allows us to rank stores of wealth. The best has always been gold, or other reputable currencies backed by gold and fully accepted by the public as gold substitutes. This time, there are none, so it must be physical gold. As noted above, the debauchment of fiat money impoverishes the private sector until there is no wealth left to be transferred by this means. In consequence, the purchasing power of gold rises to reflect its relative scarcity compared with the capital and consumer goods in the hands of distressed sellers who at the same time reject the government’s currency. Only then can we rank the capital goods relative to each other. Residential property and country estates which produce food come high on the list, as do equities of companies that manage to survive the currency collapse.

But these assets only rise measured in rapidly depreciating government currency. When the paper mark in Germany began its final collapse in 1923 a large house in a fashionable part of Berlin could be had for $100, at $20.67 to the ounce of gold, the equivalent of just under five ounces. Similarly, country estates could be had for ridiculously small amounts of gold-backed foreign currency.

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William K. 3 months ago Member's comment

Interesting while also quite depressing. And while it appears to all be correct, I would vainly wish that it were all wrong. But wishing does not make things true, no matter what Jim Moore thinks.

The irksome part of it all is that the flaws of promoting inflation were clear to me as a 16 year old high school sophomore back in 1963. Why couldn't thoe federal bankers see the truth??? Or has it been "cony capitalism" all this time, doing what helps the friends who already have a lot? And now the smell of it all is becoming overwhealming.

Gary Anderson 3 months ago Contributor's comment

There is a cult of inflation warriors. I think their legitimacy is uncertain.

Laurent Eliane 3 months ago Member's comment

Unfortunately, central banks have become the credit card of the kids (politicians) who put the responsabilities of disaster to the voters. As long as politicians are not accountable for their actions, they will not grow up (see the debate Trump Bidden).

As long as central bankcan print oaper gold, there is no insurance that they arenot printing more paper than the gold they have ( see the diif.of Germany to reappatriate a part of their solid gold.

This week was a perfect view of manipulation by central banks feeling, like this article, that hyperinflation is inevitable. So sharp discouragement of buyers, inflate zombie companies like Tulipe Musk with a horde of hypernationflagspeculator of irrealistic economic view. Tesla is not the only car but it is the "tulip" of our time.

Government with higher rate will bankrupt in no time. It is not an option for them. Hyperinflation is the only outcome with a collapse of the politics as we know today. Cash, like physical gold will be banned first as gov. cannot see who has what snd what they do with it. We enter totalitarian governments lead by corporates. The value of individual is reduce to numbers. No more, no less.

Lets go back to small villages nearly in autarcy where everybody help each other. This will survive.

Gary Anderson 3 months ago Contributor's comment

Like a boy calling wolf, inflation warnings lose power when they are continually published. Many just don't see inflation as a big threat anymore.