BUT INFLATION WAS A PROBLEM WHEN HE WAS YOUNG...:

The economy in the Fed’s hands? (Larry Kudlow, May 10, 2005, Townhall)

In the last economic cycle the Fed ignored falling inflation and instead aimed its guns at the Internet bubble. We soon were reminded that any time you deflate the money supply, the overall economy slumps badly. Stocks delivered their worst performance in over 40 years. As for signs of inflation today, the price of metals and overall spot commodities are dropping, gold is going nowhere, and long-term bond yields are at 45-year lows. These tried-and-true inflation indicators are saying: “No inflation.”

So why do we need more Fed rate hikes?

The blowout jobs report for April, with 274,000 new business payrolls and an upward-revision of 93,000 for February and March, virtually assures that economic growth for the first half of 2005 will come in around 4 percent. The tax-cut led economy continues to be stronger than mainstream economists and the media would have us believe. But will the Fed attempt to limit this growth, as it has so often in the past, with its flawed economic models that mistakenly assume that more growth and more jobs are the cause of inflation? After all, how can more people working and producing cause inflation?

Milton Friedman taught us that inflation is a monetary problem caused by too much money chasing too few goods. However, as supply-side tax cuts expand the workforce, production, and investment, the increase in goods absorbs the existing money supply. Instead of prices rising, prices fall.

Former Federal Reserve governors Manley Johnson and Wayne Angell argue that financial and commodity-market indicators can inform the Fed whether money is too loose or too tight. Free-market prices, they’re saying, are smarter than central planners. Right now these market indicators, like the money-supply figures, are telling the Fed to stop tightening.

Men in their 70s listen to Big Bands, not hip-hop.

Posted by Orrin Judd at May 11, 2005 6:47 AM