In Response to this blog post “Why Coke Cost a Nickel for 70 Years” I wrote this comment:
“Same reason the price of oil was basically the same from 1920-1970, even through the invention of automobiles and Jet Airplanes! It’s because Nixon closed the London Gold window in 1971. That’s the whole and only reason for inflation, lack of a Standard unit of Account. We don’t need a Gold Standard because then there wouldn’t be enough liquidity, but we do need a Gold barometer to tell the Fed how much liquidity the economy needs at any one moment in time.”
What this means is that the Fed should target the price of Gold as far as adding or subtracting liquidity into the economy as whole. Gold is the most Stable Unit of Account for a whole host of Reasons, too numerous to write down here.
So how does one target Gold? Once the target has been decided, let’s say for the sake of argument $1000 per ounce. Then, if the price of Gold moves above that target, that means that there is too much liquidity awash in the market. So at that point the Fed would sell bonds to sop it up. Same thing in reverse: If the price of Gold goes below the target, that means the economy doesn’t have enough liquidity, and at that point, the Fed would purchase bonds or T-bills, to add liquidity, i.e., add fuel to a growing economy.
So an economy can grow without any inflation. In fact, growth creates more efficiencies and innovation, which cause the prices of all things to come down, in “real” terms, without any inflation or deflation, needing to come into the picture.
It’s as simple as that.
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