Chicago, IL
By A.B. Dada
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To free market economists, such as myself, the term inflation means one thing: the increasing of the money supply. In simple terms, this means creating more money than was previously in existence. Inflation has a primary side effect: the increasing of prices. It has another side effect: malinvestments, which mean that investors see increasing prices in a market, so they put more money into that market, causing prices to skyrocket. This is how bubbles are created, usually put at the fault of the central bank that created all the new money. The third effect of inflation is the boom-and-bust economic cycle.

When most “normal” non-economist people talk of inflation, they mean one thing: the rise in prices. Fuel prices are up double in one year; housing prices skyrocketed 100% to even 300% in some markets in 4 years. People call that inflation, even though it is an effect of inflation, or the creation of new money.

When people speak of this simple definition of inflation, they talk of figures: 5% a year, or 10% a year, or the government’s imaginary figure called CPI of 3.1% or so. Even free market economists look at the price rises and judge them based on a percentage year over year. They’re all wrong. Price increases, the effect of inflation, is even worse.

In a market with a fixed money supply, say gold (but it could be a fixed supply of dollars, or euros, or nails or dirt, too), there’s an interesting side effect in a productive market: prices tend to fall softly over time. This is called deflation, but in fact it is just prices dropping.

When you have a fixed amount of money in an economy, and an increasing supply of goods, more goods chasing the same fixed amount of money mean that prices will fall over time. Your money, over time, becomes more valuable. This is a good thing as it instills a desire to save money rather than spend it frivolously. It means that the poor can save money to become wealthier in the future, and the wealthy who spend it frivolously can lose their wealth quickly in an economy where the money becomes more valuable by just sitting in a bank or under the mattress.

In a fixed money economy, prices tend to fall over time. In an inflationary economy, prices tend to rise over time. We generally look at just the rise in prices year over year, but we ignore the reality that those prices would actually fall, so the true price of inflation is the percentage increase over a year minus the expected decrease of prices in a fixed economy.

Let’s say you have just $100 in an economy, and that doesn’t change. There are 10 apples for sale. People are willing to pay $4 per apple. Now, a new product, oranges is released, and there are 20 oranges. They’re good, maybe better than apples, but they’re in plentiful supply. Because the money supply is fixed at $100, the same money chases both apples and oranges. People are unwilling to pay $4 for apples since a new choice is on the scene: maybe apples fall in value to $3 a piece. That’s a 33% decrease over a period of time in prices.

Now let’s say that you have a central bank that increases the money supply. Maybe they’ll add $10 to the economy. With $110 in the same economy, it is possible that apples would rise in price to $4.40, or an “inflation” figure of 10%. So the experts will say “Look, inflation is 10%!” But they’re ignoring the growth of new products to compete with those apples. Once oranges are introduced, the amount of money being grown to $110, prices might rise, but in reality they’ll fall because of the new supply of goods. Apples might fall to $3.30, which is a larger fall than we’d see in a non-inflationary economy ($1.10) but leaves us with a price higher than in a non-inflationary economy ($3.00). In the end, the apple that would normally fall to $3.00 only fell to $3.30, from $4.00 nominal pricing, which means that the figure normally quoted for inflation can be quite a bit higher.

While it is impossible to gauge what items or markets will increase in price during a period of monetary inflation, we should realize that prices in a stable currency market generally softly fall, as long as there is no surge in demand or drop in supplies. When you factor this “soft deflation” of prices in a fixed-currency economy, you can realize that even the most aggressive inflation figure estimated by free market economists is still off.

Chicago, IIL
By A.B. Dada
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As an avid gold bug, with almost a decade of praising the gospel of gold to the masses (and those closer to me), I continue to get looks of surprise from people I haven’t met in years who yell at me for not being pushier over the years in getting them to buy gold. “Why didn’t you tell me it would go up so much?”

And today, while still an avid goldbug advocating the many reasons to own gold, my new proclamation to these fine folks makes them frown: Gold is a terrible investment. No, not because I feel it will fall in relation to the dollar or other currencies; gold has always been a terrible investment, even when it has skyrocketed almost 400% in less than a decade.

Gold is not an investment, not now, not ever. Then again, most stocks aren’t investments either. For an investment to be true, it must offer two things: an asset of value, and a return on investment from the profits the asset makes. If you start your own company, that is an investment: you end up with assets (property, tools, software, etc) and if it generates a profit, you get a nice return. At any time, you can sell the company and its assets for money as well. This is a worthy investment.

In terms of the stock market, the only true investment is one where your shares purchased offer you an asset (property, tools, software, patents, etc) that would have value if sold, but the share also pays you a dividend, or a portion of the profit that company makes. Most stocks pay little to no dividend. If you buy a stock that does not issue a reasonable dividend (I believe in at least 10% annually, but my businesses can pay well over that), you’re not investing, you’re gambling. The main reason a stock price goes up is because people see new value in what the assets of that company would sell for. A company that issues no dividend is not a profitable company because the profits are spent elsewhere: capital growth, big big bonuses, advertising, etc. Would you start your own business if it paid zero profits? Of course not.

The worst investment, though, is hoarding. Be it dollars, euros or ounces of gold, hoarding has no long term gain in terms of profits paid. Even putting money in the bank is a better “investment” because you get an interest rate return, usually lower than the cost of living increases, though. Holding gold is akin to hoarding dollars. The only reason I do this is because gold tends to hold its value over time, versus all paper moneys which crash to worthlessness in usually less than one century. The U.S. dollar has lost almost 98% of its value in less than 100 years. $1 from 1910 is worth $0.02 today. Gold, on the other hand, has held up quite well, but its return is only in the gained value of its asset price.

For me, gold keeps up incredibly well to the theft of value that central bank inflation creates. An ounce of gold, to me, has stayed relatively stable versus life’s cost increases for as long as I’ve been holding gold. Even better, gold over decades has held its value, and gold over centuries has held its value. That’s all it is: a stable, consistent store of value. Yes, it fluctuates here and there due to industrial demand and investor demand, but overall, it tends to be more valuable over time (versus other currencies) because it is the only true money in existence. The first metal used by humans as money was gold. Gold has been the only money to exist as money after thousands of years of human history. Gold is the most liquid form of money imaginable: if you hold U.S. dollars and are in a foreign country, your gold ring would bring you a consistent return whereas you have no idea what the dollar will be worth depending on the market’s need for dollars.

I will never offer advice to people to buy gold as an investment. Will the price go up? Surely it will, over time, because our world’s currencies are constantly being destroyed through central banking inflation. Will it make you a profit? Maybe, maybe not, depending on how much speculation is built-in to the spot price. But it won’t become worthless, even if it falls in value over time.