Wednesday, February 10, 2010

Inflation, for lack of an alternative, is good

Rebutting deflationary issues: This post - refer to fallacy one.
I believe it hints at the fact that deflation will be due to different reasons than earlier instances.
It goes on to talk about how most currencies have destroyed their own value over time.
What used to happen before the Gold peg was released, was that prices of currencies would move in tandem with the assets which were used to back those currencies. This is well explained in the following excerpt:
A 76 year old man or woman born in the 19th or 18th centuries would have seen the value of their currency go both up and down over their lifetimes, and there is a pretty good chance that at age 76, the dollar (or pound) would be worth the same or more than it was when they were born. When the US Government fundamentally changed the nature of money in 1933, it created an entirely different pattern – all down, and no up, so that for a 76 year old person today, a dollar will only buy what 6 cents did at the time they born.

When fiat currencies were created, there was an almost continual erosion in value - which, although on the face of it, seems bad, was the only way to break out of volatility. In short, inflation is good - too much of it is bad.
Deflation is good, but only for the people holding those currencies or other assets that can hold their respective values.

Another article here points to how poorly gold performed as an asset class during the 80's and 90's. Reason: There were better assets to go into.
Currently, most things are fked and I believe that if there are signs of a collapse of the Eurozone or of the American credit rating, people will again move to gold.

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