The American Spectator

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Good as Gold

4.19.06 @ 12:01AM

THE ECONOMIST'S TWO HANDS
Re: Tom Bethell's The Fed Has Lost Power:

Generally, the reason that 30-year rates are higher than two-year rates is because of a cushion for inflation. (Duh. You know that.) The inverted yield curve means that the market is telling the fed that its recent market manipulation to drive interest rates higher is wrong.

The Fed cannot set the market 30-year rates, for example. It can only manipulate the money supply by (i) raising or lowering the interest rate at the discount window or (ii) buying or selling treasuries in the market. The market, however, is dominant on the price of credit. Fed magicians try to hit a target rate through the amounts that the raise or lower the discount window rate. If the yield curve is inverted, this means that the market thinks that the cushion for inflation is negative because it didn't add anything to the long rate, but reduced it. This gives greater credibility to the theory that we are not in an inflation right now, despite the gold indicator.

While I'm no economist, I have always considered gold to be an excellent (and long overlooked) indicator of inflation. Despite what the last paragraph says, I find it difficult to believe that after millennia it's no longer right. But I cannot explain the discrepancy between the inverted yield curve and the current price of gold.
-- David I. Held
Vice President, Bank of America, Compliance Risk Management

Tom Bethell asks who is he to argue with Steve Forbes on what the price of gold should be. Before conceding too much financial insight to Mr. Forbes, it should be pointed out that last year (May 9, 2005), Steve lead off in his "Fact And Comment" column in Forbes magazine by saying, "The Oil Bubble is about to burst. Don't be surprised to see oil at $30 to $35 a barrel within 12 months."

Well, he missed that one. Today, one year later, the price of oil is about $70 a barrel.

My humble opinion: Gold will have its ups and downs, but it's a winner in the long run. Why? Because the amount of debt and unfunded liabilities of the government is so massive that to maintain the economic order -- and hence social peace -- it will require monetary policy to become ever looser. This spells inflation which means higher prices for tangible assets, including gold.
-- Peter Skurkiss
Stow, Ohio

I find your observations as to the money supply an interesting one. But riddle me this one, sir, why did the Fed just a couple of weeks ago stop publishing the M3 money supply data?

With the dollar no longer pegged to a standard and no appreciable data to track the total dollars floating in the world markets now; it is anybody's guess as to what that value is. So essentially, your dashboard is missing the speedometer.

If I were a funds manager I would be very afraid we're not driving off a cliff.
-- John McGinnis
Arlington, Texas

Well I'll be damned.

Bethell knows what he's talking about, his analysis makes sense, and he has a bit of insight.

I've been a student of the Fed since my early days in grad school in the '70s, and rarely do I see public commentary of this high quality.

He must be an economist.

Tell him good work.
-- Jim Klein
San Francisco, California

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