The Fed’s So-Called ‘Inflation Fight’ Was a Big, Fat Non Sequitur

The Fed began raising “interest rates” on March 16, 2022. At the time the dollar price of gold was $1,936. 525 basis points worth of hikes later, the dollar price of gold sits at $2,041.

Why the mention of gold? The reason is basic, or should be. Historically inflation was a decline in the value of the monetary unit. Gold was traditionally used in the U.S. and around the world as the measure for monetary units simply because its value is so constant. In other words, when gold rises or falls in dollars it’s a sign of the dollar falling or rising, not movements in the value of gold. Since the Fed began hiking rates to allegedly whip inflation, the dollar’s value in the constant that is gold has declined.

Why once again the mention of gold? Gold as a currency anchor yet again confers stability on the agreement about value that is money. What verifies the previous assertion is the fact that currency markets were broadly non-existent before President Nixon severed the dollar’s link to gold in 1971. If currencies defined in gold had been volatile while defined, there would have been currency markets to reflect this volatility. Gold itself would have been widely traded. Except that there were no currency markets before Nixon’s wrongheaded decision, and there was little reason to trade gold. It’s once again the constant.

Crucial about all this is that Nixon’s decision in no way quieted gold. It still speaks despite no longer officially defining the dollar as it once did. And it speaks loudly. When the dollar is truly losing value, gold’s rise becomes a story.

More broadly, gold has spoken most loudly through the rise of currency markets since 1971. Without the commodity anchor, currencies “floated.” Meaning they had no fixed value. As a consequence, daily currency trading in modern times is of the trillions per day variety. It’s a market signal that actual producers in the real economy would still very much like the gold exchange standard that formerly prevailed. Money could be trusted. Now it can’t be. See frenzied currency trading where there formerly was not.

Back to the Fed, it began hiking aggressively in 2022 to fight “inflation”? Oh well, the view then and now was that pundits on both sides were mistaking higher prices for inflation. They’re different. Very different. Inflation is a decline in the value of the currency, while higher prices can be caused for all sorts of reasons. The biggest driver of falling prices is the growing number of “hands” and machines the world over engaged in creating goods and services. The greater the labor division, the lower the prices.

Lockdowns that began in 2020 to varying degrees eviscerated the very labor division that had given us low and falling prices. That higher prices followed this hideous global taking of freedom was a statement of the obvious. Alas, command-and-control is not inflation.

Yet the Fed said it was fighting “inflation” in 2022. Sure, but the Fed is staffed with individuals who near monolithically think economic growth is the cause of inflation. They’re wrong. Growth springs from investment, and investment is all about falling prices.

Others, in particular the members of the “Monetarist School,” imagine that inflation is too much money in circulation, and that the “supply” of money needs to be centrally planned. More realistically, money in circulation reflects production. Furthermore, the Fed couldn’t plan the so-called “supply” of money even if it wanted to considering that the U.S. is part of the global economy. Money in circulation is production determined, and it will flow from all points of the earth if the Fed constricts “supply.”

Austrians don’t focus on supply so much as they believe inflation is caused by “too much credit” care of the Fed. Except that the Fed has no credit. We borrow money for what it can be exchanged for, meaning the market decides how much credit there is.

It’s all important mainly because Monetarists, Keynesians, Austrians, and happy talking supply siders all believe that the Fed hiking rates has an impact on money in circulation and credit, thus bringing down inflation. Except that it doesn’t. Money and credit are production determined, period.

Inflation is one thing: it’s a decline in the unit of measure, in our case the dollar. What fixes inflation is standards meant to maintain the constancy of the currency as a measure. Which means any inflation fight that doesn’t include a standard is a non sequitur. And right now is evidence of this truth. 525 basis points worth of hikes, only for the dollar to be weaker than it was when this nonsensical fight began. Don’t say some of us didn’t warn you.