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The Supply-Side Gold Standard


Some vocal supply-siders ludicrously claimed that the Fed was not inflating fast enough during the 90s, citing the depressed price of gold as proof.  This is because they are unable to see financial asset inflation - the oceans of money that the Fed was pumping out was going into the stock market, the bond market, and real estate.   Gold itself was in a bear market partly because real money is shunned during the periods where financial assets are inflating rapidly, and partly because the price was being managed by a coalition of central banks.

Jim Bradley hits the nail exactly on the head with his dissection of the supply-side gold standard.  He is sounding very Austrian when he writes:

The price inflation is a result of the Supply-side cries for loosening during the prior price deflation!Since new credit from new money made possible the existence of capital-wasting businesses which are themselves debtors, the correction of this credit is frequently deflationary. Thus to “reflate” means to stop the market process of correcting the prior excess, and to create the same situation again.

First, inflation and deflation are a process which is manifest not first in commodities and gold, but different prices at different times depending on the circumstances.  We have indeed sustained a huge inflation from 1998-2000, but not one which affects commodities.

Second, price inflation and price deflation aren’t the real issue anyway!  What matters is the SPREAD between costs and sales prices, not any aggregative price level, no matter how calculated.  And that spread is affected by CREDIT.  Indeed there can be credit contraction while overall prices rise and credit expansion while price fall.


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