This almost freaks me out. The handful of people who regularly tune into my Saturday “office hours” for Mises Academy classes can verify this: It was literally just last weekend when I said something like, “I mean, if it weren’t for gold prices, I might be really concerned about my worldview here. It does trouble me that bond prices are so high; am I really saying all these smart guys in the market are idiots? But on the other hand, the soaring price of gold and silver during this slump should be keeping Sumner and Krugman up at night, too.”
Obviously that’s not an exact quote, but I kid you not, I said something along those lines. And then today I read at Krugman’s blog:
“(Yes, it’s 4:30 AM where I am. I found myself wide awake, thinking about gold prices. You got a problem with that?)
In assessing economic prospects since the financial crisis of 2008, there have been two kinds of people: …inflationistas and deflationistas….
I am, of course, a big deflationista, and as I see it record low interest rates strongly vindicate my position. As I like to point out, if you’d believed the inflationistas at the Wall Street Journal and elsewhere, you would have lost a lot of money.
But what about gold? As some readers and correspondents love to point out, you would have made a lot of money if you’d bought gold early in this mess. So doesn’t that vindicate the inflationistas, to some extent?
My usual response has been that I have no idea what drives the price of gold, to say that it’s a market driven by hoarding in Asia, Glenn Beck followers, whatever. But maybe I’ve been too flip here. Why not think about what actually should be driving gold prices? And I mean think about it, rather than going for slogans about inflation, debased currencies, and all that.
Well, I’ve been thinking about it — and the answer surprised me: soaring gold prices may be quite consistent with a deflationista story about the economy.