Siegel Ch. 11Gold, the Federal Reserve, and InflationWhen countries abandoned the gold standard, their stock markets soared because investors knew that governments were no longer restricted by the fixed supply of gold if they wanted to increase credit. Until WWII no real inflation, after, a lot of inflation. We fully abandoned the gold standard under Nixon in 1971.Post gold monetary policy would change the supply of money without much regard to interest rate movements. Volker used this starting in 1979 in order to curb the rampant inflation of the time, even though it resulted in a recession. In the 1950’s – 1980’s period, changes in federal funds rates haven been a good predictor of stock prices (inverse relationship). Since the 90’s, this relation hasn’t worked well because the market already tends to factor in this valuation.Siegel says that stocks are great for long-term hedging against inflation. Not good for short time (inflation increases interest rates which depresses stock prices in the short term, this is one explanation, though incomplete).
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