US inflation is now moving above 6%, the highest level it’s been since November 1990. And the previous time it was at a level this high was in the early 1980s at the tail end of the great inflationary period of the 1970s.
Why were the 1970s inflationary?
Good question – usually answered by economists using a combination of factors including the oil shock, paying for the Vietnam War, and a general downdip in the economic cycle.
What’s mentioned less often, though is the one factor that stands out above all others. In 1970, President Nixon took the USA off the gold standard, albeit allegedly temporarily, to allow for the debasement of the US dollar to pay for Vietnam.
Now, not everyone thinks inflation is a bad thing.
The super-rich don’t, because by and large they hold assets rather than cash, and these go up in notional value when inflation is on the rise, and in real value too, since as better stores of value hard assets are more in demand.
Governments also don’t think inflation is a bad thing, or at least not all bad. The reason is simple enough: all governments run huge billion and trillion dollar debt piles, but if the cash dollar is actually worth less, then so is the debt.
What does the average punter do about this?
The traditional answer has always been to buy gold, and as we progress into the twentieth century that strategy seems to be holding up well enough.
Since the beginning of the current century the value of gold has gone up by four times. Globally, real estate has done well too, but not that well.
But bitcoin, the standard-bearer for crypto-currencies, has risen a remarkable 200 times since meaningful data began to be collected towards the end of 2014. By comparison, since 2014, gold is only up by around 20-to-25% depending on exactly where you want to set your start time.
Bitcoin wins, hands down over everything, as long as we are being retrospective about the matter.
The question is: what happens next.
Naysayers argue that the whole crypto enterprise is nothing more than the latest bubble in a long line of financial bubbles stretching back to the days of the South Sea Company in the early 18th Century.
A key platform in this argument is that crytpo itself doesn’t have any actual value, that it’s all smoke and mirrors in a way reminiscent of the famous Dutch tulips that hadn’t even been planted before they were sold at huge profits, and then losses.
Bitcoin does yo-yo around, that’s for sure, but the gold price goes up and down too. After all, if we are to allow that gold is worth four times as much today as it was twenty years ago, in dollar terms at least, then we also have to allow that the price was at around US$300-odd back in 2000.
But no-one would argue that gold is a bubble.
In fact, it’s one of the oldest stores of value known to man, and although famously referred to as a barbarous relic by highly educated economists at the Financial Times, it’s not a coincidence that when the Fed turns on the printing presses for the world’s reserve currency, the market turns to gold.
And it always will. The price may go up or down in terms of dollars, or remnimbi or Euros or whatever the future reserve currency of the world may be. But that may be more of a reflection of the value of the world’s reserve currency, rather than of gold.
To put it another way, might it be true that for a certain class of investors gold actually continues to serve as a reserve currency, in spite of Nixon’s famous de-coupling in 1970?
That’s certainly the way it appears, and it leads on to another intriguing question – given that central banks continue to monkey around with their own currencies, might it be possible that bitcoin, or some other crypto of the present or future, ends up becoming the world’s reserve currency?
Don’t count that possibility out on the basis that crypto itself doesn’t have any intrinsic value. After all, neither does a piece of paper with the word ‘One dollar’ written on it. The value lies in the trust that the currency can be exchanged for goods.
The way things are going, though, with inflation running on up again, the world’s existing currencies are going to be able to buy fewer and fewer goods per unit. Wages will obviously have to rise, and so the spiral will continue, and the trust will gradually erode.
In the 1970s, there was nowhere else to go, though.
Now, there is bitcoin, a currency that can in no way be subject to quantitative easing. As long as the internet’s switched on, bitcoin stands a chance of becoming the new unit of trust. Remember that – it’s not a store of value, it’s a store of trust.
If the coming disaster goes so bad the internet ceases to function, you’re going to need your gold. Otherwise, crypto might just do it.