The latest actions by the Federal Reserve have led many to assume that much higher inflation is a foregone conclusion.  This leads to a further expectation that much higher gold prices are imminent.

That sounds logical, but it is not quite that simple.

There is a relationship between higher gold prices and inflation, but the two are not directly related. The confusion results from a misunderstanding about inflation and its effects.

"Inflation is the debasement of money by government. The inflation is accomplished via the expansion of the supply of money and credit. It is intentional and ongoing. All governments inflate and destroy their own currencies."... Kelsey Williams

The debasement (inflation) leads to a cheapening of the value of the money in circulation, which results in a loss in purchasing power.  The loss in purchasing power translates over time into higher prices for most goods and services.

What people usually mean when they refer to inflation, or higher inflation, is another matter. For most people, inflation simply means higher prices.

The higher prices, however, are the effects of inflation. Those effects are volatile and unpredictable. This makes it difficult to rely on simple financial and economic statistics, complicates ordinary business decisions, distorts financial planning projections, and skews the economic cycle.

The skewing of the economic cycle is what the Federal Reserve has been trying to do for more than one hundred years. They don't call it that, though. They call it managing the stages of the economic cycle.

In plainer terms, managing the stages of the economic cycle is the Fed's attempt to avoid recessions and depressions. They do not do a good job of it, and they don't really care; because it provides a cover for their use of inflation.

Inflation is a tool used by central banks to create conditions that allow for banks to continue to loan money and finance activities of particular interest to them. Whatever the situation or cause, the money center banks are there to loan money, and profit from it, continually.

Right now people are expecting inflation to get a lot worse because of the Fed's latest response to financial and economic catastrophe. The inflation, however, has already happened.

What most are expecting is the higher prices, maybe even to the extent of what is mistakenly called runaway inflation. Again, those higher prices are the effects of inflation; and that inflation has already been created.

The higher prices attendant to previous inflation creation occur as a reflection of a weaker US dollar. As the US dollar continues to lose purchasing power, we pay more and more for ordinary goods and services.

We said earlier that the effects of inflation are volatile and unpredictable, which is true. That is due in large part to the subjective judgement involved.

For example, ask yourself: How much value has the dollar lost already? Are current prices accurately reflective of that depreciation? Has the Fed's latest action altered your opinion? Have you allowed for forthcoming effects of those latest actions?

Small business owners, large corporations, laborers, hairdressers, restaurant owners, etc., all make subjective determinations about how much to charge for the goods and services we all buy and use.

Investors allow for the effects of inflation when making decisions regarding the purchase and sale of securities, real estate, etc.

In other words, the US dollar's current level of purchasing power; its standing in world markets; and its degree of acceptance in domestic and international markets; are the result of billions of individual choices and decisions that are subjective in nature and always changing.

Now throw into the mix that, for several decades, the inflation created by the Fed is losing its intended effect. Even the Fed seemed baffled by the lack of impetus after their actions to revive financial markets and restore economic growth just over a decade ago. (see The Fed's 2% Inflation Target Is Pointless)

Finally, lets look at the US dollar itself. Whatever else some say about the dollar, whatever are the expectations of certain writers and investors, the US dollar is NOT falling apart. It is not now, nor for the past nine years, shown the weakness that some have expected and predicted.

Over the past couple of months the US dollar has shown signs of further strength. Liquidity problems in the repo markets, slowdown and stoppage of economic activity, risk of another credit collapse, and the potential of a calamitous depression accompanied by deflation, all point to a stronger US dollar.

This means a dollar that will buy more - not less; more food, more gas, cheaper housing. Unfortunately, the supply of dollars could shrink by half or more.

Conditions like these are exactly the opposite of those which correlate with "much higher inflation and much higher gold prices."

All of this means that we will need to see renewed, significant weakness in the US dollar, manifest in the form of much higher prices for everything we buy and sell, IF gold prices are going to move higher to a degree that matches the fantasies of some investors and advisers.

(also see The Federal Reserve And Long Term Debt - Warning!)