Gold & Inflation-Deflation Debate

Nothing wreaks more havoc on the investment portfolio than the two extremes of a monetary policy gone awry, inflation and deflation. Webster defines inflation as “an increase in the volume of money and credit relative to available goods and services resulting in a continuing increase in the general price level.” It defines deflation as the exact opposite, “a contraction in the volume of available money and credit that results in a general decline in prices.” Inflation that has spun out of control is mentioned as hyperinflation. The most widely cited example of a hyperinflationary breakdown is 1920s Germany. Deflation that has spun out of control is referred to as a panic or an economic depression. The most cited example of deflationary spiral is the worldwide depression of the 1930s.

Since the time Richard Nixon took the United States (and the rest of the world) off the gold standard in 1971, an ongoing debate has been waged between those who believe the American economy is going towards hyperinflationary spiral and those who believe that a deflationary collapse is inevitable. sites have been written espousing both scenarios. Newsletter writers seem to be divided equally on this subject.

History demonstrates that gold, protects against both calamities more than any other asset. At some times, such as the 1970s, the inflationists seemed to be correct. At other times, like the early 1990s, the deflationist seemed to be correct. Until now we have escaped both extremes. Instead of inflation followed by deflation, we have had inflationary episodes followed by disinflationary or stagflationary episodes wherein the inflation rate has simply been moderated. As an example, the inflation rate of the time of Richard Nixon was sufficient for him to impose price and wage controls on the economy in 1972. presently it is considered to be a sign that we have inflation under control.

There is very little doubt that in the present fiat-money-based U.S. economy, launched in 1971, the underlying bias has been inflationary, as mentioned in other parts of this article. But this doesn’t mean that the general inflationary trend will not at some point or another resolve itself in a deflationary blow-off. In the interim, the nuances and possibilities of either one, and their possible consequence on the investment portfolio, will still be the topic of a great deal of discussion by financial analysts, economists, and lay people alike.