The Illusion of Inflation

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Economist John Maynard Keynes described the effects of inflation citing Vladimir Ilyich Lenin this way:

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

This is why governments love inflation so much and hate gold.

Here are some charts created by myself and my good friend Nick Laird who has created the best chart database for gold and silver at http://www.Sharelynx.com.

If you price something in fiat (paper, electronic) currency you certainly can believe prices always go up with just minor corrections. But if you price something in real currency like gold the picture changes totally. This is the illusion of inflation.

Chart #1: Wheat priced in fiat currency since 1260

Wheat Dollar

Chart #2: Wheat priced in real currency, gold since 1260

Wheat Gold

Chart #3: Basket of commodities (CRB Index) priced in fiat currency since 1260

CRB Dollar

Chart #4: Basket of commodities (CRB Index) priced in real currency, gold since 1260

CRB Gold.png

Chart #5: Crude oil priced in fiat currency (US dollar) since 1900

 

Oil Dollar

Chart #6: Crude oil priced in real currency (gold) since 1900

OIL Gold

Chart #7: Crude oil in US dollar and gold on the same chart

OIL USD GLD

Chart #8: Dow Industrial priced in fiat currency (US dollar) since 1800

Dow Dollar Ratio

Chart 9: Dow Industrial priced in real currency, gold since 1800

Dow Gold Ratio

Chart #9a: Dow Industrial priced in fiat currency (US dollar) vs priced in real currency, gold since 1800

Dow Inflation

Chart #9b: Dow Industrial priced in fiat currency (US dollar) vs priced in real currency, gold since 1800 (rebased to 1870=100)

Dow Inflation 2

Chart #10: Jastram’s Gold Constant: Gold price, Inflation and Gold price adjusted for inflation

Jastram Gold

In Roy Jastram’s gold chart above and the previous one of stocks (Dow Industrial Average), we can also see the effect of inflation on the volatility of real assets. (The Golden Constant, Roy W. Jastram).

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