Monday, May 16, 2011

We are all deflationists now

There is a big inflation vs deflation debate.  But really both sides believe in deflation.   Deflationists believe in deflation when measuring prices in  paper money.  The inflationists believe in deflation when measuring prices in terms of gold coins.

The meaning of the historical record is not obvious.  In the early 1930s the US was sort of on paper money and sort of 40%  gold backed.  So do you count the deflation in this time as deflation in terms of gold or deflation in terms of fiat money?   I think there is a big clue.  The way they ended deflation was by getting off the gold standard and making it illegal for people to own gold. 

If you look at house prices measured in ounces of gold they are down by about a factor of 4.  That is some deflation.