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If you worry about inflation, thank your lucky stars we have fiat currency!

6/26/2013 02:08:00 PM
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Matt Yglesias finds that NSA leaker Edward Snowden is a gold bug in the Ron Paul tradition, and points out that
"The price of gold has declined about 35 percent since its peak in late 2011, which would have meant enormous inflation in a gold-backed economy." 
This is a point I've made before--that the gold standard involves massive price volatility--but it never seems to make any difference to the gold bugs, even though the harms of price volatility seem to be their only argument.

 So, without further ado, here's a comparison between the annual percent inflation we actually had with the fiat currency (red line) to the percent inflation we would have had under a gold standard (blue line):

[Update: an earlier version of this picture used the purchasing power of an ounce of gold, rather than the inflation rate, which is its inverse]

 The red line is actual inflation as measured in percent change from previous year in the personal consumption expenditure deflator (which is the most accurate and unbiased possible measure of consumer prices). The blue line shows the percent change from previous year in the quantity of gold required to buy the same basket of consumer goods and services--that is, it shows what inflation would look like with a gold standard.

 In fact, the expression "boom-and-bust" was originally coined to describe the uniquely volatile nature of the gold standard. In reality, the fiat currency has flattened out most (but not all, clearly) of the business cycle. But I suspect none of that data matters to a Paulite, because they think they have some deeper, more important truth: they know, just know, that the monetary policies of Diocletian caused the eventual demise of the Denarius and collapse of the Roman Empire some 200 years later. And that Bernanke is dooming us all (erm, I mean our grandchildren's grandchildren) to the exact same fate.
Max 6/26/2013 06:46:00 PM
The price of gold doesn't reflect the inflation we would have had under a gold standard, any more than the price of euros reflects the inflation we would have had under a euro standard.

It would be more realistic to compare gold with a basket of commodities and currencies. To the extent gold fails to track the basket, it would be a source of price instability.
Matthew Martin 6/26/2013 09:18:00 PM
"It would be more realistic to compare gold with a basket of commodities"

That's exactly what I did! I used the PCE deflator, which is a basket of consumer goods and services.
Matthew Martin 6/26/2013 09:19:00 PM
If gold perfectly tracked consumer prices, then the blue line would be perfectly flat.
Max 6/26/2013 10:11:00 PM
95% of a consumer price index is not commodities. Just gasoline and raw food. The price of everything else is naturally less volatile in terms of dollars. The price of hair cuts doesn't go up and down every day, and this would also be true if hair cuts were priced in gold.
Matthew Martin 6/27/2013 07:26:00 AM
Gasoline and all food/beverages are 19.3% of the PCE deflator index. The PCE deflator is weighted by the average amounts we spend on consumer goods across the economy. That is not always the best (there is a difference between spending patterns averaged across people and the spending of an average person) but it is pretty unbiased.

Also, I included the PCE deflator for reference. You can plainly see that it isn't anywhere near as volatile as gold.