A different way of looking at inflation

I once saw a professor of economics on TV make the case for gold having a particularly stable value.  He said that for the (then) 150-year record of wholesale commodity prices, an ounce of gold always bought the same amount of pork bellies.  He also said that so little new gold is produced that the amount in circulation hardly changes.  What does change is the value of fiat currency — government-issued paper money.  I also happened to know one of his students at U.C. Berkeley, who was studying for her MBA.

Since gold is chemically inert, it is typically not consumed and is really not a commodity.  Silver, however, is consumed and really is a commodity.  The advent of digital imaging has, however, seriously reduced the consumption of silver since there is much less use for photographic emulsions.

True inflation is all about the devaluation of fiat currency.  The official government method for measuring inflation is to monitor the price for a specific "basket" of consumables.  Over time, various substitutions occur within that basket, and core inflation excludes food and energy because their prices are so volatile, even though they are particularly important when evaluating the standard of living.   Amity Schlaes wrote the definitive article on the government's manipulation of what is in that basket and why.

Demand inflation occurs when either the supply of goods goes down or demands for those supplies goes up.  There is no doubt that we've been experiencing supply problems, and that some demands are inelastic, not subject to being reduced because of higher prices.  An example the professor gave of inelastic demand had to do with lettuce.  Every now and then, a monsoon wipes out a big chunk of the southwest U.S. lettuce crop.  Ordinary consumers can easily decide to buy less lettuce, but thousands of restaurants with salad bars don't have that choice.

Back to gold.  Over the last twelve months, gold has gone up from $1,726/ounce to $1,818 — an increase of 5.3%.  Yes, that's about three points less than the "official" rate of inflation.  Over the last five years, however, gold has appreciated 9.5% per year (not compounded), going from $1,230/ounce back up to the current $1,818.

And, now, back to Amity Schlaes.  In her recent work Great Society, she tells how both Lyndon Johnson and Richard Nixon weaned the U.S. off any aspect of the gold standard.  Back in my youth, paper money had several qualities.  Some were "Silver Certificates."  Others were (and are) "Federal Reserve Notes."  And still others were "United States Notes."  Obviously, the last was the least secured, and still nobody cared.  Yes, there are no longer any silver certificates.  We obligingly accept the validity of our government's paper money...because we have to.  It's legal tender.

But why does it have any value at all?  Because of the "full faith and credit of the United States."  The dollar does compare well versus some other currencies, though not all.  Cryptocurrencies are currently taking a huge hit.  They have no Fort Knox or U.S. Department of Defense to prop them up.  But Venezuelans have to use cryptos, since their government's money is pretty much worthless.  Let's hear it for socialist thuggery!

Inflation is right now a paramount political issue.  But I'm suggesting that the supply-chain issue is the real villain, not the profligate public spending, because gold hasn't jumped as much as it should have.  And yet, public-sector interference has a lot to do with the supply chain problems.  Sometimes the "debauching" of the currency — creating more money by borrowing and printing — lurks in the shadows, waiting to emerge at the politically least opportune moment.

Image: PublicDomainPictures via Pixabay, Pixabay License.

If you experience technical problems, please write to helpdesk@americanthinker.com