Gold News

Could Deflation Create a Gold Standard?

A "great wave" of inflation is behind us. A long equilibrium may be next...
IF YOU'RE invested in 'sin' stocks, here's a thought, writes Callum Newman in Dan Denning's Daily Reckoning Australia.
If history repeats, there might be a 50-year decline in the consumption of alcohol, not to mention a lower crime rate and the arrival of less bastard children.
That's what happened during the 'Victorian Equilibrium' of 1815 to 1914 after all.
The Victorian Equilibrium is how author David Hackett Fischer describes the deflation in the 19th century after the major price rises that preceded it. He describes this in his 1996 book The Great Wave: Price Revolutions and the Rhythm of History.
Fischer's contention, then and now, is that the world has experienced four 'Great Waves' of rising prices since the twelfth century. They range in length from 80 years to almost two centuries, depending on which one you pick. These Great Waves of price instability brought war and hardship as well as human degradation and disillusionment.
Here's how he shows the Great Waves in his book:
When the Great Wave finally breaks, however, the world enjoys periods of equilibrium that result in a cultural flowering or advance until the beginning of the next Wave. That's what happened in Victorian England from 1815 to 1914.
I won't dwell on the cultural advance. As this is The Daily Reckoning, I want to know what the period of equilibrium meant for the money. David Fischer describes it likes this: 'Long-term inflation ceased. Prices stabilized, then declined further, and stabilized once more. Real wages began to rise, but returns to capital and land fell.'
In England, as you can see, prices were cheaper in 1890 than they were in 1819. The post office, for example, etched prices in brass. That's how little they expected prices to move. Queen Victoria's government could issue gilts (bonds) paying 2% – and for investors, that was a healthy return.
What's interesting is 1812-1914 covers the heyday of the classic Gold Standard. Sound money advocates attribute this relatively peaceful time and economic expansion in Europe partly or wholly to gold, with free trade and exchange flourishing.
Here's a thought for you: Fischer's argument could actually invert this interpretation. You could argue his 'Victorian Equilibrium' (or the absence of a Great Wave if you prefer) created the conditions for the classic gold standard to work, not the other way around. Hmm.
Because when the Great Wave of rising prices began in the early 20th century, the Gold Standard failed with it. And what a Wave it's been over the last 100 years. Steady or even gently falling prices are almost inconceivable to our modern understanding of finance. For a hundred years, high inflation has been baked into the system.
From the long view of history, anyone born this century has been riding Fischer's fourth Great Wave of the 20th Century. That's why Fischer calls us in the book, "the children of a long inflation". It's shaped our entire worldview.
It's also why there are those in the market that insist interest rates must rise and cause sovereign governments to finance the interest on their debts with an ever rising level of tax revenue.
But it's possible interest rates won't react and go higher as they did in the early 1980s. This is the position of our colleague Phillip J.Anderson, who I've been working with to launch our new service, Cycles, Trends and Forecasts.
Phil's made a lifetime's study of history, and books like Fischer's, to apply its lessons to today's markets. Over the past year, I've been fascinated to discover Phil's track record of success.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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