Gold & a Deflationary Recession

Gold has a strong inverse correlation with the Dollar. And once upon a time when the money was backed by Gold (The Gold Standard), there used to be a Deflationary Recession. The Example is The Great Depression of 1929.

Deflation means negative Inflation. It means that during the time of deflation the price of all the consumer goods and services go down. Deflationary recession is a common phenomena of The Gold Standard Money.

This is because the gold was the Money. But in the Modern time, our world is not following the Gold Standard and that’s why the modern Recession is the Inflationary Recession. The Best Example is the Recession 2008.

Because now there is no Gold Standard, The Modern money is not backed by anything. It is only backed by the full faith of government’s promise that the tax payers will pay this money. And that’s why the modern money is the currency.

It means that the government can print as much amount of money as possible. Recently (April 2009), The US Federal Reserve has printed $ 1.2 Trillion out of thin air only. And that’s why the newly printed dollars have diluted the purchasing power of the existing dollars. This is known as Inflationary Recession.

Our world will see the future Recessions Inflationary types only. Means the prices of consumer goods and services will go up. In Simple words, When there was The Gold Standard, the world used to see the Deflationary recession but now our world is not following any Gold Standard after 1971 and that’s why the modern recessions are of Inflationary types.