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February 9, 2022

You would think that in an era of high inflation that looks set to rise even further, people would be anxiously trying to warn about the dangers of inflation. Yet no matter how high inflation rises, there will always be at least some people warning about the danger of deflation.

You see this in financial media, most often on financial blogs, some written by scholars who really should know better. If you believe that deflation is a danger, and fail to take action against the dangers of inflation, you could be putting your retirement savings at risk.

The problem is two-fold. First, there’s a misunderstanding of the definitions of inflation and deflation. Second, because of that there’s a conflation of deflation and depression, which is compounded by economic illiteracy among economic historians and that has led to a myth that “deflation” as commonly understood is economically destructive. Here’s why that’s wrong, and why inflation, and not deflation, is the real cause of economic destruction.

Getting Inflation Wrong

The modern world has seen an amazing amount of subversion of the meaning of common words. After all, if you can get people to use words in a manner you want them to, or if you can subtly change the commonly understood meaning of a word, you can achieve a victory for your political aims.

We see this most often in the political sphere, where words like terrorism, sedition, and insurrection are commonly thrown about without a care for what they actually mean. In the cultural sphere, few of us would ever describe ourselves as happy and gay, thanks to the changing meaning of words as a result of the homosexual movement.

It’s no different in economics, where commonly understood terms like inflation and deflation have had their meanings changed over time. Originally, inflation was defined as an increase in the money supply, while deflation was defined as a decrease in the money supply. The effect of an increase in the money supply, all other things being equal, would be rising prices, while the effect of a decrease in the money supply would be a decline in prices.

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Over time, effect began to be conflated with cause, and now we think of inflation as a rise in prices and deflation as a decline in prices. But as with many things, getting causation backwards causes problems when you attempt to engage in analysis.

There are many things that can cause an increase in prices for particular goods, not all of them monetary. Yet those factors are sometimes called inflationary, even though they really aren’t, since they have no effect on the money supply.

The effect of that is to draw attention away from central banks and their role in inflating the money supply, making it seem as though inflation, rather than being a monetary phenomenon as Milton Friedman put it so well, is instead something endemic to the capitalist economy. Inflation is no longer something that is actively caused, merely something that just happens, almost like magic.

If you get the cause wrong, you can’t understand how to combat it. And so, instead of fighting inflation by reining in the central bank and its inflation of the money supply, we instead look elsewhere, even to the point, in some cases, of instituting price controls. So instead of being able to effectively stop inflation at the source, the “solutions” end up causing even more destruction due to misdiagnosing the cause of the problem.

Why Falling Prices Are Good

The second problem is that deflation has been conflated with economic depressions. That’s due in large part to the fact that price levels fell during the Great Depression. But why did that happen?

Price levels didn’t rise during the Roaring 20s, despite the fact that the money supply was expanding by leaps and bounds. That was because there was increased economic production, leading to more goods being available. Ordinarily that should lead to a decrease in prices, if you follow roughly the quantity theory of money, MV=PQ. Money supply times the velocity of money equals the prices level times economic output.

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That’s why if the money supply increases, prices tend to increase, all other things being equal. But if Q, economic output, is increasing, and M, the money supply, has remained unchanged, and V, velocity is normally stable and constant, the result should be a decrease in P, the price level. You would expect, after all, that as production increases each successive unit produced gets cheaper.

During the 1920s that relationship was obscured because M was increasing, so even though Q increased too, P remained the same. Then during the Depression the Fed decided to actively reduce the size of the money supply, resulting in a decrease in P. And thus the theory was born that price decreases equate to depressionary economic conditions.

That defies the natural tendency of prices to fall over time, as production increases and enhanced efficiencies allow goods to be produced for ever lower prices. That natural tendency of prices to fall over time is now seen as a bad thing. So as soon as monetary authorities detect a whiff of falling prices, they rush to the printing presses to create more money. Thus we have experienced nearly 110 years of a near constant inflationary push in the United States.

The outcome, as you can imagine, has been disastrous. The dollar has lost over 96 percent of its purchasing power since 1913, or 99 percent of its purchasing power when compared to gold. Savers and investors have been played for fools while debtors have been empowered by an ever weaker dollar.

And yet, despite all this devaluation, despite inflation reaching 40-year highs, and despite the Federal Reserve having added nearly $5 trillion to its balance sheet in the past two years, there are still people who seriously believe that deflation is more of a threat than inflation. Don’t pay attention to them.

Is it a bad thing if cars get cheaper every year? Is it a bad thing if your grocery bill decreases every month because your food gets more affordable? Is it a bad thing if each dollar you earn buys you more and more each year instead of less and less?

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That would be a nice “problem” to have, but unfortunately not one any of us are going to face anytime soon. The reality is that we’re living in an era of high inflation and rising prices, one which isn’t going to end anytime soon. That makes protecting your wealth against inflation increasingly important.

Protect Your Savings Against Inflation

The reality of inflation’s dangers is beginning to set in for more and more investors today. With high inflation rates starting to wipe out real returns on investments, and the potential for even higher inflation in the future, protection against inflation is becoming a higher priority for more and more people.

Throughout history one asset has stood out in its ability to protect wealth against inflation: gold. Gold’s performance during periods of high inflation has helped many investors over the decades. Its performance during the stagflation of the 1970s was particularly remarkable, with an average annualized growth rate of over 30%.

With the 2020s potentially on course to become a repeat of the 1970s, with high inflation and a stagnant economy, gold could very well end up mirroring its performance of 50 years ago. And that could make gold owners very happy.

If you’re nearing retirement or if you have retirement savings you want to protect, inflation will become a growing concern in the coming months and years. And gold could provide you with just the protection you need.

With a gold IRA, you can roll over or transfer retirement savings from an existing 401(k), 403(b), TSP, IRA, or similar account into an investment in physical gold coins or bars, tax-free. That gives you the protection of gold, the potential for future gains, and the same tax advantages as your existing retirement accounts.

Don’t let your hard-earned savings remain vulnerable to inflation any longer. Call the precious metals experts at Goldco today to start protecting your wealth with gold.

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Nathan Rosevear

Nathan offers insights and reviews around the highest rated precious metal IRA specialists. He is an investor in gold and silver industry.
His passion is helping Americans secure their finances through stable investing and provides such help by blogging valuable information for investors to make sound financial decisions.
Do you want some help figuring out your precious metals Investment? Feel free to give me a call at 604 603 7953.
Let me connect you with the best in the business based on your financial situation and help you save some time and maybe save you some hard earned money.
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