July 7, 2006

THE SUPPLY SIDERS ARE RIGHT, WE JUST DON'T KNOW WHICH ONES:

The Financial Paradox of Our Time? (Jerry Bowyer, 7 July 1006, TCS)

My friend Rich Karlgaard, the omnivorous and 'air-apatetic' publisher of Forbes magazine has declared that the simultaneous existence of a flat (and, sometime, inverted) yield curve and high gold prices is "the financial question of our time." I agree. Supply side economists who have lived in blissful peace with one another (at least as far as economic issues are concerned) are now split. They have fundamentally different views on the state of our economy, and what the Fed should be doing. Since the days of Ronald Reagan the supply-siders have been driving the policy debate and have, generally, forecast the pants off of the Keynesian establishment. But now they're forecasting different things. Some of those think you should focus on the gold market and some put more emphasis on others markets; bonds, for instance...
For the past year or so, the different indicators have signaled different things. Gold and other commodity prices have soared, a sign of high inflation. Interest rates and the yield curve (the difference between long term and short term rates) have been more low and flat, a sign of modest inflation. This is the paradox, and it's not just theory.

Apparently, the paradox is resolved when one realizes that the Federal Reserve has 1) printed too much money, and that 2) the excess liquidity flowed straight into commodities like gold and oil and 3) created a speculative bubble that is 4) not rationally related to the ever more efficient underlying market. Fair enough, but the imporatant question remains unasked: how and when is this disconnect going to reconnect?

Posted by Pepys at July 7, 2006 11:28 PM
Comments

It won't. We must all realize that there are infintely more players in Global economic markets than they're used to be. Until and unless global investors have confidence in anything India or China prints out as a bond, the continual ramp up of prices on ANYTHING that has US or British market controls on them will continue apace.

Posted by: Brad S at July 8, 2006 1:44 AM

Time heals all wounds. The important thing is not to create new wounds under the specious theory that new wounds can balance old wounds.

Posted by: pj at July 8, 2006 10:57 AM
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