Thursday, August 11, 2011

When Gold Hits $2,067 an Ounce

In the last couple of days, the gold price breached $1,800 an ounce. Oh well, ho hum. So the gold bugs are making some money.

But let us think about something. One day soon, perhaps this year, perhaps next year, gold will breach the magic number of $2,067 an ounce. Why is that a magic number? Because, 100 years ago, before the modern wonder of the Federal Reserve System, you could buy an ounce of gold with 2,067 pennies.

Yes. The value of today's dollar in gold is getting perilously close to one percent of its value 100 years ago, when the government would exchange an ounce of gold for $20.67.

Now some people don't like to evaluate the value of the dollar in gold terms; for those, I suggest's GDP deflator. It shows a price index of 6.23 for 1911, with 2005 prices as 100. Today the index is 111, so the value of the dollar is 5.61 percent of the 1911 dollar. On that measure the dollar buys about one twentieth what it could buy a century ago, rather than one hundredth.

Yeah, I know; many things we can buy today you couldn't buy then for love or money.

How did the dollar get to be worth 1 percent, or 5.6 percent of its value a century ago? It happened every time that the government got in a jam. In the Depression, after the Fed had gunned the economy in the 1920s, FDR devalued the dollar to $35 per ounce. Then in the 1970s Richard Nixon got in a jam and they floated the dollar. By 1980 the dollar had declined to less than $600 per ounce, but then Ronald Reagan became president and over the next twenty years gold declined to $270 an ounce in 2001. But since then, to get out of a jam in 2001, the Tech crash, and in 2008, the housing crash, the government has been devaluing the dollar with gusto. Now it's around $1,700 to $1,800 per ounce.

You might wonder why this keeps happening. It's not all that hard. Lots of people want easy money, cheap credit. So the government uses its credit to shovel money at deserving recipients. It might be farmers and farm credit, or it might be exporters and the Ex-Im Bank. Or it might be minorities that need affordable housing. No problem. We'll just shovel Fannie and Freddie at them, and when the whole thing comes tumbling down, why, we can refloat the nation's mortgages by taking the dollar down another 50 percent.

Let's call the 20th century the Century of Inflation. But let's make the 21st century something better. Because devaluing the dollar every generation to get out of a financial panic is no way to run a railroad. For one thing, as with most things, minorities and women and orphans and the poor get hardest hit.

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