(This item originally appeared at Forbes.com on March 11, 2025.)
In our 2022 book Inflation: What It Is, Why It’s Bad, and How To Fix It, we said:
When the price of gold rises – in other words, when more money is needed to buy an ounce of gold – that usually means that the dollar’s value has decreased. … Daily price movements may not be significant. But, if the price goes up and stays there for an extended period, or if it fluctuates but the general trend is up, that signals a downturn in the value of the dollar. (p. 100)
When we wrote this, it took about $1800 to buy an ounce of gold. Today, it is more like $2900. That implies an $1800/$2900=0.621 or a 38% decline in dollar value over that period. Prices will eventually adjust, over a period of years, to the new, lower value of the currency, with some prices moving faster and some moving slower. “All things being equal” (they never are but it is a good principle), we should expect a $2900/$1800 or 61% rise in prices of goods and services going forward, compared even to the inflation-boosted prices that we have had to get used to in 2022-2024. Compared to prices in 2018, when it took about $1200 to buy an ounce of gold, we should expect a $2900/$1200 or 141% increase in nominal prices.
Doesn’t seem like much fun, does it.
This is why we say “you can’t devalue yourself to prosperity.” No country ever got rich with a weak currency. They get rich with a stable and reliable currency, which means: a currency of unchanging stable value.
You would have to increase your nominal income by 141% just to break even. Maybe more than that, on an after-tax basis. Even if we do accomplish this, eventually, what it would mean is that we broke even, over a period of perhaps ten years. Instead of getting richer over ten years, we just made it back to flat. In other words, stagnation. This is basically why the Latin American countries never get anywhere. They are always just catching up to the chronic depreciation of their currencies.
This might be confusing to some people, especially those with “Monetarist” leanings, and also those with “Keynesian” leanings – between them encompassing 90%+ of all formally-trained economists.
The “Monetarists” are concerned with “money supply.” They have a sort of narrative which goes like this: “expanding the money supply” leads to “more money chasing fewer goods,” leading to rising prices. It is actually a pattern common throughout history, related to inflationary wartime finance. But, that has not been the common pattern since the Bretton Woods international gold standard era ended in 1971.
Instead, what we tend to see is: A currency loses value, for whatever reason. Often, there is no particularly unusual “expansion of the money supply” going on, or any pressure from governments to somehow finance deficits with the printing press. It doesn’t fit the Monetarist narrative at all – which is why they can’t figure out what’s going on. Later, as the economy reacts to this decline in currency value, nominal prices and nominal GDP tend to climb. Central banks typically “accommodate” this greater nominal GDP with a proportional increase in base money supply.
During the 1970s, the whole world suffered from dramatic “inflation.” The value of the dollar fell from $35/oz. during the 1960s, to around $350/oz. during the 1980s and 1990s. It was a 10:1 or 90% decline in the value of the dollar, compared to gold.
Commodity prices, and prices for everything else too, verified that the decline in the dollar vs. gold reflected a real decline in dollar value. Oil rose from $3 a barrel in the 1960s to around $20 in the 1980s and 1990s.
But, there was no particular “expansion of the money supply” going on during that whole decade. It wasn’t much different than the gold standard era of the 1960s. Government deficits were relatively small, and “printing press finance” was nowhere to be seen.
During the 2000s, another major decline in the value of the dollar vs. gold took place. From an average of about $350/oz. during the 1990s, it fell to about $1200 in the 2012-2019 period – roughly a 4:1 decline. Commodity prices again soared higher, confirming that the dollar’s real value was indeed declining. A barrel of oil went from an average of about $20 in the 1990s to $60-$100 afterward.
But, during this period, the base money supply grew at its lowest rate of the previous fifty years!
I bring this up because we are again seeing the same pattern. The “inflation” of 2022-2024 was preceded by a gigantic increase in the base money supply of central banks, as a response to the Covid outbreak. This did amount to direct government financing, as governments ran gigantic deficits, issuing bonds that were effectively bought by central banks. It fit the Monetarist (or “Austrian”) narrative well.
But today, we are seeing another big decline in the dollar’s value vs. gold, with very little expansion – even some contraction – in central bank base money supply.
This will again confuse the Monetarists and Austrians (they are easily confused), but we should recognize that this is actually a common pattern, just as we saw in the 1970s and 2000s.
But, that’s why we had to write a book about Inflation.
