In 2008, the Wall Street Journal’s Posted by Craig Karmin Biography of the dollar. In it, Karmin casually observed that before 1971, “there was no need to buy foreign exchange because all major currencies were pegged to the dollar rate and could only change in unusual circumstances.”
All major currencies were pegged to a dollar which was pegged to gold as 1/35u of an ounce of gold. There is a lot of information in the previous truth. What this typically tells us is that whatever your view of gold is, you cannot seriously deny the remarkable stability as a measure of value that gold has conveyed to the dollar. What verifies the previous statement is the increase in currency trading since 1971. 1971 when President Nixon severed the dollar from gold.
Foreign exchange purchases were made when the dollar lost its gold link to commodities. The latter is not a passionate or religious observation so much as something easily verified by the markets themselves. There are currently $7 trillion+ worth of forex traded on a daily basis. Yes, gold has permeated the dollar (along with currencies pegged to the dollar) with remarkable stability.
This is something to keep in mind with current and future inflation fears. Popular economic religions such as Keynesianism, the Austrian school, the monetarist school and the supply side claim that the Fed is the solution to the problem of “inflation”. Except that “inflation” is an understatement of the currency, and when applied to the dollar, there has been no notable weakness in recent years. Some, including yours truly, have long argued that there is an ocean of difference between current high prices and inflation, but that’s another column. For now, it’s just useful to point out that once again there hasn’t been a noticeable decline in the dollar in recent years.
Back to the Fed, can various economic religions be serious? When we borrow money, we borrow access to real resources (natural and human), so the very idea that the Fed could curb inflation through interest rate interventions defies logic. The economy is global and credit is directed to its highest uses worldwide. A central bank (the Fed) dealing in artificial interest rate concepts through rapidly shrinking banks (relative to total credit, both domestically and globally) that it treats as a way of allegedly slowing government credit inclusion offends seriously the fool.
Really, since when do price controls work? Does anyone think he works here? Especially in a world where those who match capital with talent and growth are so handsomely rewarded for doing just that? However, to read the thoughts of the dominant economic ideologies (see above), it must be said that contradictory realities from the 20u century, central planning actually works. Just let the Fed step in, and if it regulates access to credit in the right way, there will be no inflation.
Taking the absurd further, when has government price intervention ever worked in the past? The price of anything is a consequence of highly sophisticated global cooperation between producers, but again according to the Keynesians, Monetarists, Austrians and Supply Siders, rising prices can be tamed with appropriate intervention by Fed officials.
In fact, the only cure for higher prices is higher prices. That something so basic needs to be said speaks volumes for how awful economic commentary has become in the 21st century.St century, meaning that it will be said. Prices rise and fall for all sorts of reasons, and if they rise, the only solution to the latter is a higher price. It exists as a signal calling for more production, improved production techniques, a substitution, or a myriad of other things. With prices falling, it’s about the same.
What is important is that inflation is not caused by higher prices. To say that it is, is like saying that coughing is caused by smoking. Inflation is again a decline in the medium of exchange, the dollar in our case. Which means that if we want to capture what some imagine is inflation now, or ensure we don’t have it in the future, the shiny answer is hiding in plain sight while it is animated by trillions worth of foreign exchange trades every day. The stability of gold gives the currencies measured in it stability. The inflation correction is not about the Fed, but very much about gold.
