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Inflation!?! What Inflation!?!

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  • Inflation!?! What Inflation!?!

    Low Inflation Is in the Money

    Low Inflation Is in the Money

    The Fed should take a breather.

    Monetary trends are pointing to a mild slowdown in the growth rate of money-GDP, but the risk of inflation is well contained. This is a healthy monetary story.

    In order to make some sense of the key money-supply numbers, I use a 36-month “smoothing technique” in order to clarify the major trends. I also use the same model for calculating the velocity, or turnover rate, of money. The results show some very clear trends. First, on the demand side, the slower growth of money measures like MZM and M2 is partially offset by a faster hand-to-hand turnover of money since the middle of 2003. This implies a growth rate of roughly 5.5 percent for nominal GDP (or GDP measured in current dollars).

    Over the past couple of years nominal GDP has grown at around 6.5 percent annually. So it’s possible that future GDP growth will slow by about a percentage point.

    As for the supply of money, which is controlled and created by the Federal Reserve, a clear slowdown has taken place since the mid-2004 restraining policies were first initiated. That, coupled with rising investment demands in part fueled by lower tax rates on capital, has worked to remove the excess money printed by the central bank in 2002 and 2003.

    As I have often noted, the Treasury yield curve has flattened, bond rates are historically low at just above 4 percent, spot commodity prices (excluding oil and gold) have been flat for almost 20 months, the gold price has been trading in a narrow range, and the dollar has stabilized. All of these real-time inflation-sensitive market-price indicators are reflecting a rollback of inflation risk. Draining of liquidity by the Fed has also contained the impact of the energy spike so that core inflation remains around 2 percent or slightly less.

    I wish the Fed would add or drain reserves with a sharp eye on financial and commodity prices instead of the overnight federal funds rate. But the fact remains that the monetary authority has thus far done a pretty good job of maintaining monetary balance and domestic price stability. In other words, this would be a good time for Alan Greenspan & Co. to take a breather and assess the results of their policy restraint. The Fed should take the next six months off.

    In a nutshell, here’s the inflation situation: Supply-side tax cuts over the last two years have increased the demand for money (and economic growth). Meanwhile, Fed restraining actions have reduced the growth of money supplied. Therefore, inflation risk has been minimized. Will the Fed avoid the mistakes of the past and not over-tighten? Will lower tax-rates remain in place? If the answer to each question is yes, the outlook remains bright.

    But with this Federal Reserve, we’ll have to wait and see. Perhaps when Greenspan steps down next year his successor won’t have us guessing so much. May I make two suggestions for the next Fed chair? University of Pennsylvania professor Jeremy Siegel and former Fed vice chair Manley Johnson would make excellent candidates. Johnson wrote the book on the commodity price rule while Siegel carefully monitors financial and commodity indicators of inflation. Both have solid academic and financial-market experience.

    A Fed that lets real-time financial and commodity prices guide monetary policy? Imagine that.
    A sleep inducing piece by Kudlow whose only value consists of the absurdity of his trying to shit in our face and call it apple pie by insisting that there'll be no inflation. average grocery bill's up over 15% from last year and my weekly gas bill is over 40% what it was last year....but there's no inflation, right?!?!

    The government does not like to count food and fuel which are basic items that people need every day and prefers to count items made by serfs in China or which they can claim was improved (by adding a button nobody uses) so they can “adjust” the price to reflect these so-called improvements. The government has been lying about the inflation rate for at least 30 years from my personal knowledge and probably longer then that.