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Why deflation is not in the cards

Deflation is when all prices fall relative to the unit of account—when the value of the unit of account rises relative to the prices of all goods and services. That is most certainly not the case today, as these three charts make clear.

Gold has risen steadily for the past 9 years against the dollar. Spot industrial commodity prices are only inches from making new all-time highs. And the dollar is very close to its lowest levels ever against a large basket of foreign currencies—which of course means that prices in other countries are historically high relative to our prices.

All you can reasonably say about prices today is that some prices are falling while many other prices are rising. We are seeing a lot of relative price changes, but we are definitely NOT seeing all prices decline. It is almost inconceivable that we could be on the cusp of an actual deflation when commodity and gold prices are soaring and the dollar is very weak against other currencies.

The closest we have been to an outright deflation was in the 2002-2003 period, and that's when the Fed first panicked at the prospect of deflation. Leading up to that period, we saw gold and commodity prices plunge, and the dollar soar against all other currencies. And the proximate cause of all that was a period of extremely tight monetary policy from 1995-2000. Today we have the exact opposite set of conditions. This is not a deflation.

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