When the Dollar Falls to 1/1500th of an Ounce of Gold

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Back around 2005 when housing was booming, far from a sign of economic vitality, the proverbial "rush to the real" signaled a growing economic downturn. Thanks to a dollar in freefall as evidenced by a spike in the price of gold, always limited capital was migrating toward the hard, unproductive assets least vulnerable to currency devaluation.

To put it simply, the real recession was the housing boom.

Since the dollar’s lurches in either direction tend to set the tone for global currencies, our monetary error was something shared by everyone as a run on paper currencies around the world fostered a global misallocation of capital into land, rare stamps, art, gold and other unproductive assets. The alleged worldwide boom characterized by a rush to the tangible was a classic "money illusion" that flashed economic hardship due to the world’s innovators suffering capital deficits in concert with sinks of hard wealth receiving capital in abundance.

Happily, markets are nothing if not self correcting, and the misnamed "recession" of 2008, which was in fact a positive signal of economic rebound as housing and other hard assets ceased their bull run, was the corrective mechanism meant to reverse a substantial episode of Austrian School malinvestment. Of course, and as is well known now, rather than embrace the curative powers of what was once again a misnamed "recession", the political class set out to blunt its positive effects through bailouts and other subsidies of failed ideas such that Americans were robbed of the positive economic snapback that "recessions" always author.

The above surely looms large at present, because it’s not unfair to suggest that we’re experiencing yet again the severe capital misallocations that forced a distorted correction in 2008. To see why, look at the gold price.

Though it traded in the then nosebleed range of $800/ounce back in 2008, gold has since nearly doubled to $1500/ounce. Its spike to previously unseen levels is a signal that all the chatter about whether there will be a downturn is well too late. Gold at these levels IS the downturn, and an eventual "recession" that hopefully includes a revived dollar to undo all the misallocations occurring at present will be the cure.

Indeed, much as the weak dollar drove a recessionary rush into the real not long ago, so is the same occurring once again. This, not the inevitable correction, is the true recession, and that’s why the gold price (nothing more than a proxy for the dollar’s actual strength or weakness) is so useful as an economic signal.

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