The Unimportance of Inflation: Stocks & Flows

One of my specializations in graduate school at George Mason University was monetary theory. It included two classes taught by Larry White who specializes in free-banking, Austrian macroeconomics, and monetary regimes. Separately, my dad was a libertarian and I’ve attended multiple Students for Liberty events. Right now, I’m writing from my hotel room at a Catholic/Crypto conference, where I learned that the deepest trench in Dante’s Inferno includes money debasers.

Everything about my pedigree suggests that I should have a disdain for the Federal Reserve and cast a wistful gaze toward the perpetually falling value of the US dollar. But I don’t. I certainly do have opinions about what the Fed should be doing and how our monetary system could work. But I’m not excited by the long-run depreciation of the dollar.

Let me tell you why.

Learning a little bit of theory is a dangerous thing. Monetary theory is especially hard because we examine the non-good side of the transaction: the medium of exchange. In frantic excitement, enthusiasts often point out that the value of the dollar has lost very much of its value in the past 100 years. They describe that loss is by describing the lower quantity of something that a dollar can purchase now versus what it could have purchased historically. That information is incapsulated in the price of a good. The price of a good is the number of dollars that one must exchange in order to purchase the good. Similarly, the price of a dollar is the number of goods that one must give up in order to purchase the dollar.

We can consider a variety of goods. Below is a graph that describes the quantity price of the dollar where the quantities are CPI basket units, gold, and housing. In the 35 years following 1986, a single dollar purchases 60% less of the consumer basket, 74% fewer houses (not quality adjusted), and 76% less gold.

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