30 thoughts on “Inflation? What Inflation?”

  1. He’s right. Most of the chief indicators (bonds, money supply) give little or no cause for concern. And yet, the dollar price of gold has been increasing. As a commenter to Kudlow’s post points out, it’s unwise to disregard what markets are doing. The tacit conceit of the Administration and Fed is that they can run a noninflationary weak-dollar policy. They have pulled it off so far and maybe they will continue to do so, but I think there’s a good chance they’ll eventually screw up. An extended rally in gold vs. the dollar is cautionary.

  2. If NorK goes bye-bye, wonder what this’ll do?

    But then the IAEA said this morning that Iran’s making gases it shouldn’t be.

  3. I agree. A picture paints a thousand words.

    Whatever a person’s fundamental view may be, the gold market is telling us that we’re getting a bit of inflation.

    But you need to look at gold over a broader time horizon, too. For instance, put up the 20-year monthly chart. Based on that chart, I think you’ll agree that gold has been historically low for the past several years.

    Does this mean the current move is just a return to “normalcy,” or is it something to be alarmed about?

    I realize that is a rhetorical question. I guess the real question here is where do I park my money in this situation? – fixed assets, commodities…

    We’ll see.


  4. I bought a set of garden tools at the hardware store–steel, hand painted with wooden handles. Would have cost $25 five years ago. Cost $8.99. My buddy bought a KIA for $14K. Great little car, far more than basic transportation.

    You guys are the smart commodity watchers. But for every commodity creeping up I can show you another batch of quality consumer goods available for substantially less than we would have paid 5 years ago, and I’m not even talking in real terms. That has got to count for something.

    Doesn’t it?

  5. Things you might WANT are going down (mostly manufactured goods); Things you NEED are going up (food, health care, energy).

  6. torchpraise: I’m not giving advice.

    spongeworthy and Fred: You raise a good point about the difficulty of measuring inflation. Indices and market baskets are always problematic because the indexed goods are difficult to define or price consistently or change qualitatively over time. Historically, the price of gold (click for long-term charts) is a pretty good indicator of inflation, money-supply growth (here and here) is an OK predictor of inflation and long-term interest rates are a good indicator of inflationary expectations.

    Currently, money growth and LT interest rates are restrained and gold is perky. The big question, to paraphrase torchpraise, is whether gold is a leading indicator or is merely rebounding to a reasonable price range from the depressed levels of the late-1990s deflation. I don’t know anything, and it’s clear that some people who do know disagree with me, but my sense is that the Administration’s weak-dollar policy and high spending levels are making or will soon make inflation the political course of least resistance. Time will tell.

  7. Obviously the Chairman agrees with you. But it isn’t clear the markets do. Bonds are still, after today’s hiccup, not convinced we’ve screwed the pooch with all this debt. Why? We never have, that’s why.

    But that aside, when the Chairman talks, you listen. Listening to that guy has saved me a batch of money over the last 10 years. And he says we just about have to expect them furriners aren’t going to keep buying bonds at this rate forever.

    But inflation? Too many dollars chasing too few goods? I dunno. We sure have a lot of goods to chase.

  8. In my little corner of the world (where I have a small retail/service business) product and fuel combined make expenses appear to be about 10% greater this year. I would like to hear some others estimates in similar circumstances.

  9. What about the positive side effects of inflation? We can inflate our way out of all this consumer debt = )

    “Nito, you owe $10 billion on your American Express”

    “No problem, let me grab my checkbook.”

  10. Econopundit has this:

    On these data Bear Stearns’ David Malpass warns:

    Stock and bond prices fell with the dollar this morning in a so-far mild case of capital flight from the U.S. They were responding to Fed Chairman Greenspan’s comments in Frankfurt linking the value of the dollar to the U.S. trade deficit. The gold price topped $448, signaling the weakest value for the dollar since the 1987-1988 dollar crisis (when the stock market crashed and gold nearly hit $500.)

    Until today, dollar weakness had not hit U.S. stock or bond prices….

    More at his site.

    Is the price of food pegged to what food cost in 1948 or is that just food stamps?

    And how do the hurricanes factor in???

    I know the energy component factors in there as well.

  11. It IS the 70s all over again.

    The bright spot in Malpass’ comments:

    –Importantly, we note big policy opportunities, partially offsetting the damage from dollar risk. The Administration appears to be making substantial progress limiting the growth in discretionary spending without yet having to resort to vetoes. A growth-oriented tax reform based on reducing the compound double taxation of savings is under discussion.

    –Apart from the risk of a weak-dollar trend, the economic platform is solid in our view. We note the 5.5% unemployment rate, high levels of liquidity, the relatively low U.S. government debt/GDP ratio, strong corporate profit growth, and growth-oriented tax cuts.


    Relatively low US gov’t debt/GDP????

    How can that be??????

    And does MSFT’s $32 billion (?)pump help at all? Even psychologically?? What about Intel’s doubling of its’ divvy?

    Now if we can get Buffet to knock off…. a few more billion into the Treasury and a boon to certain parts of medical research…….

  12. “The gold price topped $448, signaling the weakest value for the dollar since the 1987-1988 dollar crisis (when the stock market crashed and gold nearly hit $500.)”

    Maybe it’s my unique take but wasn’t the ’87 market crash and the eventual ’90 recession the result of Greenspan’s over-reaction to the conditions we are seeing today, i.e., “twin deficits”? My recollection is that the dollar was way overvalued (too strong) in the 80’s. Inflation was higher then, but it wasn’t outrageous especially compared to where it was a few years earlier.

    “The Administration appears to be making substantial progress limiting the growth in discretionary spending without yet having to resort to vetoes.”

    I must have completely missed this development, where was I?

    At this point my decidedly non-expert opinion has waffled back and forth so many times on whether the Fed is creating too much money or not that I don’t know where I stand anymore. You can make a good case for either viewpoint.

  13. “DS – W said no more than 2% increase in the budget I think before the election, IIRC.”

    So “making substantial progress” means that he made a campaign promise? Campaign promises were made to be broken, I’ll believe it when I see it.

    When dealing with politicians, there is a decided difference between “said” and “did”.

    Call me back when he actually cuts something from the budget.

  14. Another reason besides inflation that would jack gold prices up is political instability. Others have mentioned the Iranian WMD program, and the news reports are reporting the fighting in Fallujah. All this certainly qualifies. During World War II, for example, gold was in high demand, and if the price floated like now, no doubt it would rise in a similar fashion.

    Once things quiet down, if gold stay up there, *then* we should worry about inflation.

  15. Steven, if you are right, perhaps an increase in Intrade’s odds for the Iraqi election would be correlated with an increase in price of gold.

  16. …Of all the leading nations, France, which last sold gold in 1968, has long been seen as the most reluctant seller of bullion. The confirmation by the French central bank fills a significant part of the Central Bank Gold Agreement, which was renewed at the end of September for another five-year term by 15 central banks which agreed to sell collectively up to 500 tonnes a year under the new accord. Germany plans to sell up to 600 tonnes in coming years and the Netherlands plans to dispose of 165 tonnes. Switzerland said it would sell 130 tonnes, reducing its bullion holdings from 2,600 tonnes in 1996 to about 1,300 tonnes. This leaves another 1,000 tonnes that has still to be confirmed for sale under the agreement. Italy is the only signatory with significant gold reserves that has yet to confirm any sale plans. The Bank of France’s gold holdings account for more than half of its reserves,…

    So, who’s buying?


  17. Jonathan, if I’m right and the Intrade odds for Iraqi elections are rising, then the price of gold may be cresting soon.

    However, my guess is that the French and Germans are engaging in (what they hope is) mild deflation, which would cause the dollar to slip against the euro. Deflationary policies to keep up with the euro would put the USA in a position where there may not be enough credit to prosecute this war against terrorism.

    We ARE in a war. War is no time to engage in anti-inflation programs, especially if inflation seems to be in check (as the interest on the US Treasury instruments indicate).

    I am concerned that if we were to intensify an anti-inflation program, we may suffer a deflationary economic collapse of the likes to make the Great Depression look like rip-roaring prosperity.

  18. Steven, thanks. I meant to say: “if you are right, perhaps an increase in Intrade’s odds for the Iraqi election would be correlated with a decrease in price of gold.” So, yes, if election expectations increase, and especially if the election takes place as planned, on your theory we should soon see a crest in the price of gold. That would appear to be a necessary, though not a sufficient, bit of evidence to support your theory.

    I don’t know if you are right about France and Germany, but time will tell. Kudlow says essentially that the inflation situation and the economy generally look good, but that the gold rally may indicate trouble ahead. Malpass is cautiously optimistic but concerned about inflation. IOW, nobody knows and nobody is making strong predictions. We’ll all have to wait and see what happens.

    I agree that the war comes first, but I think we’d be less likely to have excessive inflation if we cut domestic spending. The genesis of the inflation of the 1970s was in LBJ’s guns-and-butter spending policies in the 1960s. There are some parallels between then and now, at least WRT govt spending.

  19. Jonathan, I agreee that a cut in domestic spending is a good thing. However, even with a GOP Congress, you have LOTS of people who are reluctant to prosecute a war, unless our backs are against a wall. The problem is, such a situation makes us LESS likely to win a war than if we were to choose the most opportune moment.

    So, in order to prosecute the war when advantageous to us, President Bush has apparently given Congress their pork in exchange for sufficient credit to properly project American power. Unlike Theodore Roosevelt, Bush seems to lack the ability to bully Congress to take the necessary action to properly use American power.

    I believe President Reagan also took this “I let you spend, you let me spend” approach to push the Cold War to a happy end.

    I recall from the history books that when Congress jacked up military spending in 1898, the Spanish were shocked that we could spend so freely without having our credit adversely affected. From the present interest rates, it seems that we are able to do it again in 2004.

    I also am loathe to engage in a deflationary fight with the euro. This was one reason we went into the Great Depression: France bought our gold, and we cut the money supply to stop the outflow of gold. Dumb move.

  20. Gold is not just a monetary metal.

    It is also an industrial metal.

    Might the relative price rise indicate increasing demand in the electronic/electrical sector which has been in the doldrums for the last 3-4 years?

  21. China and Japan have huge dollar reserves as well.

    A big problem will be if OPEC switches over to the Euro for oil contracts.

    But say China, Japan, Europe, and OPEC lets the dollar into freefall, they’re basically killing their biggest customer and market for their goods.

  22. Incognito:

    I think that this, however, is a risk that I think they are willing to take. If the dollars falls enough, people will want to use something more stable as a key currency. Of course, in this scenario, France and Germany would hope that it’s the Euro.

    I agree with your assessment, though. If Europe puts the dollar into free fall, they will be cutting off their noses to spite their faces.

    There are people betting on a MAJOR, decades-long depression that will bring about not only the collapse of the dollar, but possibly the market system we know. What these people don’t realize is this: What makes them think that, if such a collapse were to occur, they will be able to keep any gains from short-selling America and the market?

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