Thursday, July 5, 2007
Econ 101: Inflation, world currencies, gold...
Up until April of 1933 the U.S. dollar was as good as gold. The two pictures are of the two sides of a $20 gold piece that was in circulation up until that date when FDR ordered the confiscation of all privately held gold money. That "Saint Gauden's" $20 coin contained about an once of pure gold. Today a troy once of gold sells for about $650. Gold isn't worth more. The dollar is worth less. The dollar, in fact, has been rapidly losing value against gold since 2001 when gold was selling for about $300 per ounce. Inflation is coming back ala the 1970's. That is when President Nixon officially unlinked the dollar from gold, the last of the world's currencies to fall to that fate. Never before have all the currencies of the world been merely fiat paper promises with no anchor to gold and thus nothing to keep governments from inflating away.
From The Wall Street Journal Online (subscription required) David Ranson and Penny Russell diagnose the ills of the dollar, as well as the rest of the world's currencies. Gold is the canary in the coal mine when it comes to inflation... meaning much more is ahead. Here are some excerpts from their article:
"Interest rates are on the rise in the Eurozone, Great Britain and Japan, as well as in India and China. But the Federal Reserve has again elected to keep its target rate on hold despite repeated assertions that inflation risk is still its predominant concern. Are central banks abroad recognizing a threat that their American counterpart has yet to acknowledge?..."
"What's more, the recent rise in the euro and sterling relative to the dollar has obscured the fact that the world economy has embarked on another classic "run" on paper currencies that is driving inflation up everywhere. For several years now, as was the case in the 1970s, all the world's currencies have been depreciating relative to stable benchmarks such as gold. Since the end of 2001, these declines have ranged from 38% (in the case of the euro) to nearly 60% (in the case of the dollar)..."
"Why then has the pace of consumer-price inflation to date been so much less noteworthy than the pace of currency depreciation against gold? The answer lies in the timing: Gold is a fast-moving leading indicator, whereas consumer-price indices are slow-moving indicators that lag far behind. We all learned in the period between 1975 and 1985 that consumer prices do eventually catch up. It is the size of the move in the gold price, rather than in the consumer price index, that is a true and timely indicator of the magnitude of the inflation problem..."
"In the U.S., for example, cumulative consumer-price inflation was zero from 1820 to 1913, just prior to World War I..."
"Inflation is not intrinsically global -- it is obvious that some countries experience more inflation than others. But currencies depreciating against gold across the board is a sign of world-wide inflation -- and it has begun to set off alarm bells in many major economic capitals. But in Washington, our own central bankers remain placidly confident that everything will turn out all right..."