Liberty Economics

Laissez-Faire News & Commentary

Category: Economics

Be afraid of the dollar, not gold

I have been working to educate people about the dangers of inflation and the crisis that is looming on the horizon for the past six years. The pathological origin of this precarious economic situation we are in has never been an enigma for me. My on-radio New Year’s prediction for the year 2002 was that the price of gold would go up, and people better get some to protect themselves against inflation, i.e., the devaluation of the dollar. I was laughed at by the host of the program that I made my prediction on, since, as the attorney-host said, the danger we were facing was “deflation.”

At the time I made that prediction, the price of gold was about $270 an ounce, which was near the price gold had been stagnating at for quite some time. The year 2002 was exactly when the price of gold started to rise exponentially. Do I have special access to information that others don’t have? No. My forecast was based on nothing but a sound understanding of economics.

How did I see this coming? I owe a special debt of gratitude to Murray Rothbard, who still teaches from beyond the grave. It was about the year 2000 when I first read one of the late Professor’s books: What has Government Done to Our Money? That was my epiphany. Not only did the lights go on for me, but I was impressed with the saliency of Rothbard’s writing. No platitudes, no sterility, and no obfuscation. Every word was indispensable to the construct of substantive thoughts that were easy to understand. It is lies – not the truth – that must be camouflaged with pseudo-intellectual hieroglyphics.

By the time I got done reading my first Rothbard book, I was able to sum up America’s economic problems with one word: inflation. Reading my first Rothbard book impelled me to read more and more of his books, as well as reading other Austrian School economists. After reading Murray Rothbard, Ludwig von Mises, and Henry Hazlitt throughout the year 2000, I had a very good understanding of why the sudden revelation of a cluster-of-errors, known as a recession, occurs: inflation.

I will do my best to explain how inflation (i.e., an expansion of the money supply, which the politicians and their central bank are responsible for) causes recessions as briefly as possible.

As goods and services are exchanged for devalued dollars, profits are over-estimated. This is due to orthodox accounting practices, and the way people are trained to measure transactions in strictly nominal terms. I call it two-dimensional thinking. The seller exchanges his goods or services for these devalued dollars, earning, say, a seven-percent return in nominal terms. The problem comes when the seller has to replace capital, or re-stock inventory, when the seller discovers that there was a failure to account for inflation, i.e., the devaluation of the dollar. That seven-percent return in nominal terms turns out to be less – perhaps even a negative rate of return – in real terms, because prices are higher. Inflation causes people to over-estimate profits. Without even realizing, people are using up original, and even more than original, capital. What looked profitable wasn’t profitable, forcing a contraction.

Before the revelation phase known as the recession, the over-estimation of profits causes even more mal-investment in those sectors that appear to be profitable, but really aren’t.

That which is unproductive is unprofitable, and would not last for very long in the unhampered free market. The biggest beneficiary of inflation is the inflator itself, i.e., government. Just look at how huge the government is, and it isn’t just unproductive, but counter-productive. This should lay to rest any doubt about how inflation nurtures mal-investment.

The inevitable consequence of, and economic catharsis for, mal-investment is liquidation, i.e., a true correction. Unfortunately, the mainstream economics profession is lax in this understanding. It is normal that certain prices should drop due to mal-investment. This is where mainstream economics turns logic upside down. Instead of realizing that the inflation before the collapse of certain industries is the cause, mainstream economics uses econometrics to examine piles of data. The data itself becomes synonymous with the recession, as though nothing in the past helped cause the present circumstances. The recession caused itself. From this thought pattern, it then follows that to adjust those “markers” of the recession is to provide the cure. If certain industries are collapsing and prices are falling, the government must inflate even faster, argue mainstream economists. It is akin to pushing the mercury in a thermometer down to cure a fever.

Having been armed by brilliant Austrian School economists with an arsenal of knowledge, I could see the fallacy in using inflation to cure the recession; I could see that the government’s “recession response team” at the Federal Reserve would cause more inflation and calamity. The government and its central bank would do everything in its power to combat “deflation.”

Power is an intoxicant, and the regime running the United States is well past inebriated. I have no reason to believe this current cabal of promiscuous spenders will end the orgy any time soon. As dependable as the idea that bears sleep in the woods is, prices will go up as long as politicians keep devaluing the dollar to finance their spending orgy. That is axiomatic. We have had chronic inflation for almost a century. There is no mystery about this, yet so few seem to understand. The real scary thing is that many politicians and their followers believe the way to mitigate the impact from rising prices is to inflate even more, like there is a dollar shortage.

People have been inundated with phrases like “housing bubble.” Let me say this: there is no housing bubble; there is no gold bubble; there is a dollar bubble. I don’t see the dollar bubble getting “popped” short of hyper-inflation.

If the 1980 price of gold is adjusted for the expansion of the money supply (i.e., inflation) up to the present time, today’s price of gold would have to reach over $2,000 per ounce. Relatively, I believe the price of gold is still very cheap. The United States has started to exhaust its ability to finance cheap imports with inflated dollars. I believe the price of gold is just starting to come back into parity with reality with the upward surge. Ignore the financial press. Every time the price of gold drops more than a dollar, the reactionary financial press starts ringing alarm bells. No sooner does the price of gold go up by another twenty dollars. It is never too late to protect yourself by purchasing precious metals, but the earlier the better. You will lose by holding onto dollars that are losing purchasing power. Be afraid of the dollar, not gold.

Liberty Economics © 2016 Frontier Theme