Is It Inflation or Deflation?

The thing that rivets our attention in respect of the inflation numbers yesterday is not so much the fact that the purchasing power of the dollar is collapsing but that the greenback’s actual value in monetary terms — ounces of gold — has been soaring. “There you go again,” we can hear our readers rumbling. Our reply: “You’re darn tootin’.” We studied economics at the feet of Daniel Shays, George Washington, Alexander Hamilton, and the boys.Just since mid-March, the value of the dollar has soared to a 1,726th of an ounce of gold from less than a 2,039th of an ounce of gold. That’s an increase of 18 percent. It’s all the more impressive in light of the 9.1 percent jump in consumer prices in June over the prior year, announced yesterday. It’s a rate of inflation not seen since 1981, when the inflation of the 1970s was beginning to be tamed by President Reagan and Chairman Paul Volcker of the Federal Reserve.The latest news of the CPI inflation is an “economic siren” for Washington, Politico reports, challenging, CNBC says, “the narrative that inflation may be peaking.” The PhDs at the Fed are planning another interest rate hike. President Biden is trying to spin the data as “outdated.” The dollar, meantime, keeps appreciating against gold, having risen 6.5 percent from its value of an 1,839th of an ounce of gold the day Mr. Biden swore to the Constitution.There are explanations for the dollar’s appreciation in gold. The monetary metal famously pays no interest. The Fed, though, has yet to move on interest rates to a degree that would make the dollar an investment competitor of gold. The central banks of the eurozone and Japan are even slower off the mark than ours. The Bank of Japan has fixed — pegged — the yield on the ten-year Japanese government bond at a quarter of one percent. None of that means the gold value of the dollar isn’t telling us something. We tend to think of the monetary metal as a leading indicator. Those who make a point of watching it have been saying for years that the collapse of the value of the dollar in gold would eventually be reflected in the Consumer Price Index. There are famous economists — Paul Krugman, say — who ridiculed that idea. Our own view is that gold works on a long timeline. At the start of this century — meaning, the start of George W. Bush’s presidency — the value of the dollar was a 265th of an ounce of gold. In 2005, when the dollar collapsed to below a 500th of an ounce of gold, we began this long series of editorials, alluded to, obliquely, in the first paragraph of this one. So, just to underline the point, from the time gold started flashing its warnings, it took nearly a generation to get to the inflation just reported.It was something like nine years ago when Professor Krugman suggested that to understand the economic debate, the Austrian one needed to consult was neither Friedrich Hayek or Ludwig von Mises but Sigmund Freud. We pointed out that Freud had a famous case study about the tendency of people to fixate on gold. We treasure the moment not to rib Professor Krugman. Just to savor that it turns out that the advocates of sound money weren’t the ones who were crazy. So now we’re perking up at the appreciation of the dollar in gold at a time of inflation in the CPI. It’s a moment to watch, we say. The dollar appreciation in gold is only four months old, and it might yet reverse itself. It might turn out, though, that when Mr. Biden suggests the inflation numbers are outdated, he himself is looking at gold. It’s too soon to tell. It’s not too soon to note that we, for one, will be watching the value of the dollar in gold.

Is It Inflation or Deflation?

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