Larry Edelson, publisher of the Real Wealth Report (August 2010), discusses central bank responses to the global economic crisis and how understanding asset price valuation  requires that your point of reference is gold, not fiat paper currencies.

The US Dollar was at one time backed by gold, and as such, saw very little fluctuation in terms of asset purchasing power. That, of course, has changed with the advent of fractional reserve lending and we now have to consider prices in nominal and real terms:

At the heart of the matter is the difference between the nominal value of an asset, and its real value.

You see, when the world was on a gold standard, there was never any discussion in the markets of the terms nominal versus real. They were one and the same.

They were defined in terms of the price of gold. One dollar in 1930 would buy you roughly 1/20th of an ounce of gold. In 1933, roughly 1/3rd of an ounce, and in 1971, 1/40th of an ounce of gold.

So even though throughout that entire period there was still some inflation — your dollars bought you less and less gold — you always knew what the real value of your money was.

It’s entirely different today. You have no idea what your money is worth when you simply look at the nominal quoted values of assets. Your money is effectively lost at sea and subject to nothing more than government whims about how much money will be printed, what your leaders’ fiscal policies are, and what other investors around the world think of your money (and your government).

That’s why I consider it absolutely essential — more than ever — that you look at the differences between nominal and real values. When you do, it will open your eyes, and you will see the world in an entirely different way.

Consider, for instance, the Dow Jones Industrials. In nominal terms as I pen this issue, the Dow is down 27.8% from its peak of 14,279.96 in October 2007.

But in real terms, in terms of its gold purchasing power, the Dow is down a full 50%. Even worse, when measured from the dollar’s purchasing power high in 2000 — and gold’s low back then — the Dow’s real performance over the past decade is a stunning loss in real terms of 79.6%.

[emphasis added]

At one time, individuals traded gold and silver directly for goods, until paper currency systems were introduced in the last 200 years. Even then, however, assets were still priced in gold-backed currencies, so one could still value other assets in gold, and for the most part, prices remained stable for decades. It wasn’t until President Roosevelt devalued the US dollar against gold in the 1930’s, and President Nixon took us off the gold standard in 1971, that we began to see pronounced price inflation in goods and services vs. the dollar.

In addition to a significant decline in the value of the Dow Jones versus gold, Larry Edelson points out that other asset classes are also losing value to the precious metal:

(Over the last 10 years)

• Gross Domestic Product vs. Gold: Loss of 62%
• Median Home Prices vs. Gold: Loss of 70%
• Per-Capita Income vs. Gold: Loss of 70%
• Beef vs. Gold: Loss of 63%

Edelson argues that, “In real terms, we have witnessed massive deflation that already rivals the deflation of the Great Depression.”

Depending on the point of reference, it is possible to see why some people hold the belief that we did, in fact, have a recovery. They continue to price their assets in terms of dollars, trillions of which were pumped into the system as stimulus, bailouts and tax credits. Because prices “recovered” from their 2009 lows, people assume that they have “stabilized.” However, in real terms vs. gold, prices have actually continued to decline!

Perhaps this is why most people haven’t realized we’re in a depression.