Friday, July 07, 2006

Inflation - Gold or Silicon?

We have a split among supply-side economists over the danger of inflation. Jerry Bowyer at TCS Daily says.
Forbes, Brian Wesbury, the Wall Street Journal Editorial Page and the New York Sun have tended to side with gold.
Among them Rich Karlgaard says since the price of gold has risen 8% in recent weeks we have to worry about inflation. But others say that we can get so much more out of silicon and knowledge that gold can not longer be "the gold standard."
Arthur Laffer, David Malpass, Larry Kudlow, Alan Reynolds and TCS Daily's Jim Glassman have been more reluctant to depend exclusively on this price signal, and have been much less alarmed about inflation. Some of these guys have been doing some shifting around lately too. ... The good guys are disagreeing with one another for a good reason: the data are mixed. What a pity! For two decades we had markets that spoke clearly and a Fed chairman that didn't. Now we have a Fed Chairman who speaks clearly and markets that don't.
As Bowyer says it:
We're not much better at getting gold out of the ground than we were last century, but we're much better at getting wealth out of electrons. Our economy can now grow at a faster pace, by far, than the mining industry can. Our economy now grows faster than our gold supply. This means that gold prices, reflecting gold scarcity, will be an imperfect messenger. Think of it this way: imagine two economies. One is made up entirely of jewelry stores. The other is made up entirely of iPods. Gold and silver prices would be a great inflation predictor in the jewelry-world. The price of metals would translate fairly directly into rings and chains. Gold would be a terrible predictor of inflation in iPod-world.
Let's watch this. It matters immensely for our financial future.

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