Inflation Capitulation Signals Dollar’s Demise, Gold’s Rise

A June 7th report from Deutsche Bank’s Chief Economist, David Folkerts-Landau provides interesting reading for two reasons. Inflation: The defining macro story of this decade

On the surface, it’s a review of the “paradigm shift” from supposedly low inflation to high and higher inflation.

Beneath the surface, however, we see an exercise in revisionism. The writer attempts to depict the clear capitulation on inflation by most Western central banks as (instead) some sort of calculated policy choice.

Cause and effect: central banks didn’t “choose” inflation, they created it

Folkerts-Landau’s report is a cynical exercise: pretending that central banks are choosing to accept something that they are helpless to prevent. Understanding this requires a more sophisticated understanding of inflation.

This was provided to readers in a recent Dynamic Wealth Research article.

You dilute a stock and it loses value. You dilute a currency and it loses value.

It’s not a difficult concept to grasp unless you happen to be a central banker or an economist. To these “experts”, the concept of dilution is unfathomable.

The dilution of the U.S. dollar is as undeniable as it is extreme.

Indeed, the (correct) economic definition of inflation is to increase (“inflate”) the supply of money.

Dilute the currency by increasing the supply. The currency loses value. Prices rise. Cause and effect.

Once upon a time, real economists understood this.

Inflation is always and everywhere a monetary phenomenon in the sense that it can be produced only by a more rapid increase in the quantity of money than output. [emphasis mine] - Milton Friedman, 1970

But today, in the fantasy world of Western central bankers and modern pseudo-economists, such cause-and-effect doesn’t exist. Central banks aren’t causing the recent explosion in inflation, they are merely accepting it.

The reality is that have absolutely no choice.

After you initiate a cause, you can’t wish away the effect. The U.S. dollar (along with other Western currencies) has been diluted – past tense. Now we are reaping the consequences: soaring inflation.

Back to the revisionism.  According to Folkerts-Landau:

The most immediate manifestation of the shift in macro policy is that the fear of inflation, and of rising levels of government debt, that shaped a generation of policymakers is receding.

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