There will be a slow, grinding, downward adjustment of all dollar prices

The National Investor/The American Spectator ^ | 2001 | Jude Wanniski

[A. Pole]

In 1995, I predicted that inflation's days were numbered. A year later I warned of a new, more exotic enemy-deflation.

Throughout the boom and bust of the late 1990s and the new millennium, I detailed this foe's attacks as it stomped its way through Asia, Russia, Brazil and the U.S. farm and energy economies, and later as it crashed into Wall Street and Silicon Valley. Now it ravages global telecommunications companies and capsizes every Third World economy that counts its debt in dollars, from Argentina to Zimbabwe.

[A. Pole]

Wanniski was predicting the simultaneous deflation and contraction for years.

[RippleFire]

bump

[doom n gloom]

marked for later!

[Thane_Banquo]

Wow. He got one right.

Though I don't believe we are seeing true deflation, he was right about the contraction, but that can be purely probabilistic, and not represent any true expertise on his part.

This same guy was a huge Saddam apologist, so he obviously can't be that bright.

[Thane_Banquo]

The current deflationary process in the U.S. began in late 1996 when the dollar price of gold and all other commodities began to fall.

Gold has been falling relative to the dollar since the 1970s. How does Wanniski explain the recent rises in the price of gold?

[A. Pole]

How does Wanniski explain the recent rises in the price of gold?

I wondered about it myself. Does anyone have a related link?

[litehaus]

You caught that.........

,,,"the Fed also caused the deflation we see evidenced by the declining gold price."

[eno_]

This is the first thing I ever read that makes me actually want to buy gold without feeling like I've also been sold a tinfoil hat.

[A. Pole]

This is the first thing I ever read that makes me actually want to buy gold without feeling like I've also been sold a tinfoil hat.

Wanniski wrote it in 2001 and gold already went up. Could it be too late now to buy? Can the leadership figure out the ways to inflate the dollar?:
AngloGold Report:

[Deuce]

Could it be too late now to buy?

You'd still be relatively early. The fact that Wall St is trying to hype the "too late" b.s. after first ignoring gold is virtual proof. Do you see the slightest amount of bullish hype that ends every bull market?

I find the article lacking in direction and purpose. I virtually always feel this way when reading Wanniski. I'm either totally baffled by his pov or violently disagree with it. Early on, he quotes von Mises, with whom I virtually always do agree, but I don't see how the quote relates to the rest of the article.

[tubebender]

While lowering the top income tax rate from 44 percent to 28 percent, the Reagan Tax Reform Act of 1986 had included an increase in the capital-gains tax to 28 percent from 20 percent without protection against inflation. Inflation can push real capital-gains tax rates above 100 percent on long-held assets, as the tax shifts from real gains to spurious inflationary increases in valuation.

My eyes glaze over when reading pieces like this due to the shruken nature of my aged brain but this quote jumped out at me because my investment are in real estate. I did not realize Reagan raised capital gains rates but I have always maintained that gains are more a result of government fiat than appreciation and to be taxed on them was planned thievery .

[Former Proud Canadian]

bump for later

[Starwind]

Interesting article. As you read, bear in mind this was written in 2001. You might also read the source article as there are couple inserts that didn't make it into the FR post.

It was Mundell in 1960 who first made the argument in this context, that if a government has two targets, it needs two 'arrows' (policy instruments) to hit them. Monetary policy cannot hit both at once. If government wants stability of the general price level, with no inflation or deflation, it should use a monetary arrow to hit that target. If it wants economic expansion, it should use the fiscal arrow for that. The principle should boil down to 'tight money and easy fiscal policy' in combination, to achieve non-inflationary growth.

I think Frank Shostak would agree here, and argue further that this is way to restore the 'pool of real funding'.

Wanniski weaves an interesting review of depressions, deflations and their causes, though her history seems slightly rewritten (at least as I'm familiar with it).

The Great Depression was chiefly a contraction, not a deflation. It was not caused by the Federal Reserve making dollars scarce relative to gold, the proxy for all commodities. It was caused by tariff and tax shocks that erected barriers between domestic producers and between exporters and importers.

This recognition - learned at The Wall Street Journal at the same time I [Wanniski] was learning about monetary policy from Mundell and fiscal policy from his protégé, Arthur Laffer - is what prompted my momentous discovery that the 1929 Crash was caused by the Smoot-Hawley Tariff Act of 1930.

I think Frank Shostak would argue with this. (see Does a Falling Money Stock Cause Economic Depression? wherein Shostak writes:

Observe that economic depressions are not caused by the collapse in the money stock (as suggested by Milton Friedman), but come in response to a shrinking pool of real funding on account of previous of loose money.

The money supply was expanding 1920-25 and reversed 1925-1929. The trigger for the Stock Market Crash may have been Smoot Hawley, but that is not the reason for the enduring depression which followed.

As wise a man as he is, Fed Chairman Alan Greenspan has not been wise enough to realize the problems he caused by ending the dollar inflation, only to preside over the dollar deflation that is now forcing down the general price level.

Greenspan was worried about the mini-inflation he allowed when the Clinton tax increase of 1993 reduced the demand for liquidity, and the Fed did not remove the surplus by selling bonds. Gold had averaged $350, more or less, since 1985. It rose to $385 in 1994 and stayed there, despite Greenspan's efforts to squeeze out the inflation with higher interest rates.

I don't recollect Greenspan ever worrying or trying to 'squeeze out inflation', rather my recollection is he was inflating all the time, acclerating in 1996, tightening up (and bursting the bubble) only in 2000.

Wanniski also views Gold's falling prices as a natural consequence of bad monetary policy and seems oblivious to the manipulation (shorting) of Gold prices (see Preemptive Selling of Gold: The Bigger Picture, and Preemptive Selling -- 1985 through March 2002, and More Proof):

The current deflationary process in the U.S. began in late 1996 when the dollar price of gold and all other commodities began to fall. In 1997-98, the pivotal price of oil plummeted from $25 to $10 per barrel.

It is hard to disrupt the world gold market by adding gold faster from gold mines, or withholding it, because its total stock is so enormous compared to annual production of less than 2,500 metric tons.

But Gold can be (and seems to have been) massively shorted.

Unfortunately, when the price of gold began its decline from $385 per ounce in 1996 to about $275 today, Greenspan decided it was not a useful signal of monetary deflation.

Well, actually Gold's falling price wasn't a sign of deflation, but of manipulation - yet neither Wanniski nor Greenspan seem to know.

In 1996, as Internet investment accelerated and the election results pointed to a tax cut in 1997, the price of gold began its decline. Mostly blind to these developments, even misreading them as inflationary and deploring them as 'irrational exuberance,' the Fed failed to supply the liquidity the market needed.

[A. Pole]

Well, actually Gold's falling price wasn't a sign of deflation, but of manipulation - yet neither Wanniski nor Greenspan seem to know.

You post is very interesting. You seem to be knowledgeable and confident in your opinions. Would you mind to tell what is your background?

[AEMILIUS PAULUS]

In addition we have been losing our heavy manufacturing base, corrupt politicians are loading up our country with people who will undercut wages, there is a total willingness to "screw" ones fellow American(a social factor.) In short political and social elements are playing an ever increasing role over and beyond pure economic considerations.

[imawit]

I agree with your rebuttal of Wanniski’s article and would like to add more.

Taxes are mentioned along with some of their deleterious effects. The most evil and insidious part of taxes is that rules are for the benefit of the few and for government and nowhere addresses how taxes can be the least hindrance while still performing its function. Taxes in the state they are in currently are only for the purpose of looking good while at the same time confiscating as much capital as possible in the most covert way as possible. Taxes need to be on a consumption basis and only then will they properly align with economic activity.

Of course this takes the power and money away from the politicos to do as they please.

Next, a gold standard or any standard is better than what we have now where a FED chairman can do anything he feels is correct or efficient but these actions may or may not be in line with the current monetary needs. Here too the mechanism is set up by which the FED has complete independence as to what should be done. This also places personal views, concepts, abilities and favoritism into the mix and dare I say, they are the only part of the mix by which policies are put forth. Monetary policy should never be in such a position as to have the accolade ‘he did the right thing’. It needs to be purely mechanical and no one’s experiments or prejudices should ever come into play. Gold does offer the most advantages in being used as a standard.

Finally, there is always the under or oversold phenomena in economics, the boom and bust cycle that cannot be managed. Where does this fit ? Well is doesn’t. This just has to happen and it always will.

In conclusion, the ill advised, ill conceived, always tainted by favoritism or prejudice or just plain stubborness and stupidity management of monetary and fiscal policies needs to be eliminated. What kind of chance to you think this has of going anywhere ? It used to be the way things worked but not any more.

[Tauzero]

Hoe can you tell if something is manipulated?

[Fractal Trader]

Thank you for a well-reasoned and well-researched reply.

You have set a standard in this post that all of us at Free Republic should aim for.

This is such an incredible forum.