It Has Nothing to Do With the Fed

In 2008, the Wall Street Journal’s Craig Karmin published Biography of the Dollar. In it, Karmin casually observed that prior to 1971, there “was no need for a foreign exchange market because all major currencies were pegged to a dollar rate and could only be changed in unusual circumstances.”

All major currencies were pegged to a dollar that was pegged to gold as 1/35^th of a gold ounce. There’s a lot of information in the previous truth. What it notably tells us is that whatever your view of gold, you can’t seriously deny the remarkable stability as measure of value that gold transmitted to the dollar. What verifies the previous statement is the surge in currency trading since 1971; 1971 when President Nixon severed the dollar’s link to gold.

Currency markets came to be once the dollar lost its golden commodity link. The latter isn’t a passionate or religious observation as much as it’s one that is easily verified by markets themselves. Presently, there’s $7 trillion+ worth of currency trading on a daily basis. Yes, gold imbued the dollar (along with the currencies pegged to the dollar) with remarkable constancy.

This is something to keep in mind with fears of present and future inflation top of mind. Popular economic religions including Keynesianism, Austrian School, Monetarist School, and Supply Side claim that the Fed is the solution to the “inflation” problem. Except that “inflation” is a devaluation of the currency, and applied to the dollar there hasn’t been notable weakness in recent years. Some, including yours truly, have long argued that there’s an ocean of difference between the high prices of the moment and inflation, but that’s another column. For now, it’s just useful to point out that there’s once again been no notable decline in the dollar in recent years.

Back to the Fed, can the various economic religions be serious? When we borrow money we borrow access to real resources (both physical and human), so the very notion that the Fed could restrain inflation through interest rate interventions insults reason. The economy is global, and credit is directed to its highest uses globally. A central bank (the Fed) fiddling with artificial notions of rates via the rapidly shrinking banks (relative to total credit, both domestically and globally) it deals with as a way of allegedly slowing credit accession stateside seriously insults stupid.

Really, since when do price controls work? Does anyone think they work here? Particularly in a world where those who match capital with talent and growth are rewarded so handsomely for doing just that? Yet to read the musings of the dominant economic ideologies (see above), is to be told that contra observable realities from the 20^th century, central planning does in fact work. Just let the Fed intervene, and if it fine-tunes credit access just the right way, there will be no inflation.

Taking what’s absurd further, when have government interventions involving prices ever worked in the past? The price of anything is a consequence of remarkably sophisticated global cooperation among producers, but according once again to Keynesians, Monetarists, Austrians and Supply Siders, rising prices can be tamed by proper intervention of Fed officials.

In reality, the only cure for higher prices is higher prices. That something so basic needs to be said speaks loudly to how awful economic commentary has become in the 21^st century, which means it will be said. Prices rise and fall for all manner of reasons, and if they’re rising the only fix for the latter is the higher price. It exists as a signal calling for more production, enhanced production techniques, a substitution, or myriad other things. With falling prices, it’s much the same.

What’s important is that inflation is not caused by higher prices. To say it is, is like saying that coughing causes smoking. Inflation is once again a decline in the medium of exchange, the dollar in our case. Which means if we want to arrest what some imagine is inflation now, or ensure that we won’t have it in the future, the shiny answer is hiding in plain sight while being vivified by trillions worth of currency trading daily. Gold’s constancy gives currencies measured in it constancy. An inflation fix doesn’t involve the Fed, but it very much involves gold.