The Myth of Inflation

In the course of conversations with my conservative friends about the specter of ‘inflation’ they inevitably bring up the idea that gold is at an all time high.  Which it is, if you don’t adjust for inflation.  But that paints an inaccurate and a misleading picture.  Right now, gold is trading at about $1400 per ounce.  However, if you adjust for inflation, gold was trading at a record high in 1980, at about $2300 per ounce, 65% higher than it is right now.  Is gold trading higher than it has in the recent past in absolute dollar terms?  Yes, but that has more to do with economic uncertainty and hedging against a weak dollar than any genuine inflationary pressures.

To say that gold is trading at an ‘all-time high’ not only isn’t accurate, it’s also feeding the incorrect idea that we’re somehow in an inflationary economy.  This couldn’t be further from the truth.  The past two years have seen the strongest deflationary pressures any modern American economy has experienced.  The value of assets, across the board, from real estate to industrial goods to securities has all fallen, and fallen sharply, in the past two years.  And any upward movement in commodity prices is better explained by surging industrial demand from Asia than an underlying erosion in the value of the dollar.  We are actually at risk of entering into the same kind of deflationary spiral that beset Japan in the 1990s, which denied the previously vibrant economy ten years of any substantive growth.

So, while gold may provide a relatively safe haven in turbulent economic times, anyone who points to its surging price and says that it’s an ironclad indicator of inflation, beware.  They don’t know what they’re talking about.*

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*Disclosure: I had to retake two basic economics courses at Michigan State, so there’s a good chance that I don’t know what I’m talking about either.  Economics has always struck me as more of an art than a science.

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