The "I" Word

There is a much-hyped editorial in the WSJ today regarding inflation. The first part of it talks about the effect of inflation on the value of money over time. While accurate, it is certainly not earthshattering or groundbreaking (unless you believe the talking heads on TV). Perhaps the editorial is getting so much attention is that inflation hasn't been a real problem here for a long time. Maybe inflation is high due to the efforts earlier this decade by the Greenspan Fed to "re-inflate" the economy (remember that?)? It certainly has almost nothing to do with the current Fed attempts to lower rates, although that may nudge inflation higher down the road.

The second part of the editorial regarding the the author's calculation of inflation using the price of gold is nothing short of nonsense. Gold, the most overvalued commodity given its lack of intrinsic value, is a misplaced measure of anything. People have turned it into a measure of inflation expectations, but it's relative lack of real uses (I don't count jewelry as a real use) makes it a poor measure. If the oil or copper were used, then maybe this calculation would have credibility. In addition, the author only goes back to 1999. That works conveniently for him, but he seems to have forgotten that the price of gold was $850/oz. in 1981, not much lower than it is now. Using his calculation going backward, this country would have experienced deflation through the '80s and '90s that would have made the Depression look like a picnic.

Commodity prices have increased over the past decades partially due to worldwide growth and globalization, both of which have come about due to the policies and beneficence of the United States. The rest of the move is due to the massive amounts of speculative capital that have rushed into these markets. Electronic trading has made it much easier to trade and to execute complex strategies on a global basis. Remember what happened when equity markets opened up similarly in the '90s? I'm not calling for a crash like the NASDAQ disaster, but there are some parallels. Let's face it, should the price of oil be double what it was last year? Should wheat be four times higher, and then drop 11% yesterday? These markets have gotten ahead of themselves and price adjustments will come. Using only one of them to come up with an inflation calculation is irresponsible, to say the least.

Part of the reason for the run up in inflation recently is the uncertainty in the United States about the future, both economically and politically. While what can be done is being done on the economic front (it has to run its course) and the election won't be decided for eight months, Congress could act on future tax policy now, specifically making the 2001 tax cuts permanent, which would go a long way to reducing the uncertainty. That's not going to happen. The other option would be for all the Presidential candidates come out and say they are committed to not allowing tax rates to rise, but that isn't going to happen either. I guess we're stuck with the uncertainty, higher commodity prices, and higher inflation for the foreseeable future.