World Wide Real Inflation and Gold

by Michael Kastone. March 24, 2003

I've found that most people do not understand the difference between Macroeconomic terms of Inflation/Deflation vs. the Microeconomic terms. There's also much debate of Inflation vs. Deflation. So I've written the following.

There are two types of inflation/deflation. First is plain Inflation/Deflation as most people know it. It measures the rise or fall in price of goods and services. Second is "Real" Inflation/Deflation. It measures the float of currency relative to other currencies around the world (plus credits given by banks). It is crucial to realize the differences in order to understand the following.

If the government prints more money than the foreigners, that is real inflation for U.S. - more dollar bills in circulation compared to other currencies.

If other governments print money faster than U.S., that is real deflation for U.S.

If more banks increase credit to consumers, that is also real inflation - increased form of currency into circulation.

Most agree that the world will be competing for foreign demand in the road ahead. This means that they will be forced to print money in order to devalue their currency and attract foreign investments.

We are very likely to see the governments in a printing race. Will U.S. meet real inflation or real deflation? Whether U.S. wins this race or not is not the true question for Gold investors.

The true question is, "Is the float of total currencies of world increasing or decreasing relative to Gold?" We are currently at Dollar standard. But we are more than likely to switch to gold standard in coming years. If that is the case, the race to print money is in reality, World Wide Real Inflation. And the rise in price of gold is inevitable.

Gold is a very unique commodity. Its resources are pretty much "fixed" whereas the power to print currency is "unlimited."

In terms of Microeconomic inflation/deflation (price of goods and services) - we are likely to suffer from deflationary pressures at the early and mid stages of recession/depression (due to price competition and excessive supply). Only towards the late stages of recession/depression, will we see inflationary prices. (As supply and demand finally cross over)

But again, I point out, Real Inflation is, should be, or soon to be, about the "Total float of currencies around the world" vs. "Gold."

Contact Information

Michael Kastone | Ocean City, MD, USA | E-mail