The American Spectator

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

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.

p>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. br> -- David I. Held br> Vice President, Bank of America, Compliance Risk Management /p>

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.

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