Sunday, July 4, 2010

Rick Rule at The Daily Bell

This post is in response to the interview with Rick Rule at The Daily Bell. I attempted to post it on the site, but again had difficulty.

The original Daily Bell article can be found here:

In deference to Weeble, I will keep my post short. I also will second (or third, or fourth) Weeble's comment that the Daily Bell writes wonderfully well. I myself have nitpicked one or two items that seemed flawed philosophically, however after the hundreds of articles I have read, to nitpick one or two makes clear the exemplery quality of the work.

Inflation or deflation -- as the Daily Bell makes clear -- define the terms. In the only true (Austrian) sense, it is defined via the money supply. In this case, we have inflation, and will only have inflation. The central banks will create more money and as long as CPI doesn't grow they won't slow down. The worst (best), they eventually slow down when the CPI takes off. They will not stop or certainly not reverse.

If defined via the CPI or some such, again we have only had inflation and will only have inflation. Even Japan (the darling of the deflationist camp) has never had more than a percent or two of price deflation in a year or two over the last 20 years...statistically insignificant.

Where I believe there is merit in the deflation camp is in asset prices and certain other areas wherever fiat has ruled: housing prices, college tuition, various financial assets, etc. I don't believe gold will be affected in this, or if so to a relatively minor degree.

Now, if one really believes in deflation (any of the above definitions) why would you own gold? By definition, with deflation your dollar (or swissie or euro) will buy more (of whatever) tomorrow than today. What reason would I have to own gold -- subject to various tax and control issues, when I can hold currency that will increase in value at no cost, no tax ramifications, no political risks?

There is no reason if you believe in deflation. Deflation does not destroy the currency. If you believe it will destroy the currency, then by definition you believe we are headed for inflation, not deflation. A destroyed currency cannot buy what it used to buy (if it can even buy anything at all). This is inflation in any definition you want to choose.

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