Let’s imagine that the gold standard was not abolished in 1971, and was instead maintained — or, alternatively, assume that only gold is money and that other things are merely paper intermediaries. What would be the shape of economic data under that paradigm? Here’s retail gasoline:
Priced in gold, that’s the lowest it’s been since 1995. How about food?
Priced in gold, food is pretty cheap too, not experiencing the kind of rampant inflation that it has experienced in dollars. What about those US Treasuries that Paul Krugman is worried are sinking to record lows? Here’s 1-3 Year bonds:
Priced in gold, it is cruelly obvious that we are in a gold-denominated deflationary depression. Perhaps practicing massage-the-figures pseudo-Keynesian voodoo with Professor Bernanke isn’t working? As I wrote last week:
The current DJIA:AU ratio is close to 1:8. At the peak of the NASDAQ bubble, when central banks were offloading gold, that ratio was more like 1:45. So Roubini is superficially correct that gold has risen a long way — until we note the fact that the DJIA:AU ratio throughout the last 200 years has tended to more like 1:1. In the 1800s it was as low as 5:1. One things Keynesians, and particularly Roubini do get correct is that global confidence, and therefore demand is shooting to once-in-a-century lows.
But the underlying factors causing the liquidity and confidence shocks aren’t going anywhere — military overspending, political corruption, indebtedness, withering infrastructure, oil dependence, deindustrialisation, geostrategic instability, bailout culture, the derivatives-industrial complex, food and fuel squeezes and so forth. So this gold-denominated deflationary run will continue for a while yet. If the DJIA:AU goes back to 1:1 gold might run all the way to $5-11,000 (depending on how far the DJIA falls).