Needed: Leader to re­store pro-growth econ­omy

The Washington Times Weekly - - Commentary -

Fed head Ben Bernanke, at his first-ever news con­fer­ence on April 27, slammed the door shut on any new QE3 pump-prim­ing. The $600 bil­lion QE2 pro­gram to pur­chase bonds will end on tar­get at the end of June, and that will be that. Bernanke also sug­gested that the Fed’s “ex­tended pe­riod” for the nearzero fed­eral funds tar­get rate could end in a cou­ple of meet­ings.

Per­haps these an­nounce­ments sug­gest a bit-less-easy mon­e­tary pol­icy. Per­haps.

But Bernanke had no de­fense of the sink­ing dol­lar, or the in­fla­tion it brings, or the drop in mid­dle-class liv­ing stan­dards it causes.

So it’s lit­tle sur­prise that gold prices surged $24 to $1,526 dur­ing the Fed chair­man’s press con­fer­ence. Sil­ver jumped sharply, as well. The mar­kets clearly don’t see any King Dol­lar shift by the Fed.

Bernanke just doesn’t get that in­fla­tion-sen­si­tive mar­ket­price in­di­ca­tors, like ris­ing gold, oil and com­mod­ity in- dexes, and the fall­ing dol­lar ex­change rate, are try­ing to sig­nal higher fu­ture in­fla­tion. In­stead of lis­ten­ing to mar­kets, he is de­ter­mined to fight them. This is a los­ing battle. In­stead of a mar­ket-price rule (an­chored by gold), we have some sort of Bernanke fine-tun­ing rule. It’s not work­ing.

While Bernanke slightly down­graded the cen­tral bank’s eco­nomic out­look and slightly up­graded its in­fla­tion concern, the Fed still holds out “hope” that the slug­gish 2 per­cent firstquar­ter gross do­mes­tic prod­uct will give way to 3 per­cent or more growth later this year, and that the com­mod­ity-based bulge of in­fla­tion will come back down as com­mod­ity prices some­how sink. This seems to be a tri­umph of hope over ex­pe­ri­ence.

With the con­sumer price in­dex run­ning about 6 per­cent an­nu­ally in the first quar­ter, the real in­fla­tion-ad­justed fed funds rate is deeply neg­a­tive.

Un­der sim­i­lar cir­cum­stances in Europe, Jean-Claude Trichet raised the Euro­pean Cen­tral Bank tar­get rate by a quar­ter of a per­cent last month.

By that bench­mark and oth- ers, the Fed’s so-called re­turn to nor­malcy is way be­hind the curve.

Look, the eco­nomic emer­gency dat­ing back to the fall of 2008 has long been over.

And the al­leged de­fla­tion threat has com­pletely dropped off the radar screen.

In the ab­sence of these risks,

Bernanke just doesn’t get that in­fla­tion-sen­si­tive mar­ket-price in­di­ca­tors, like ris­ing gold, oil and com­mod­ity in­dexes, and the fall­ing dol­lar ex­change rate, are try­ing to sig­nal higher fu­ture in­fla­tion. In­stead of lis­ten­ing to mar­kets, he is de­ter­mined to fight them. In­stead of a mar­ket-price rule (an­chored by gold), we have some sort of Bernanke fine-tun­ing rule. It’s not work­ing.

the Fed’s on­go­ing emer­gency poli­cies, in­clud­ing the zero tar­get rate and the $600 bil­lion QE2, make no sense at all and should be with­drawn.

I re­call how Pres­i­dent Rea­gan of­ten ar­gued in the 1980s not sim­ply that a strong dol­lar was in the nation’s in­ter­est, but that a great coun­try, by ne­ces­sity, needs a strong and re­li­able cur­rency.

Link to gold, that was Rea­gan’s ar­gu­ment. Paul Vol­cker and then Alan Greenspan (dur­ing the first three of his four Fed terms) es­sen­tially agreed with Rea­gan.

The 20-year col­lapse of gold prices that en­sued was associated with a re­mark­able non-in­fla­tion­ary pros­per­ity and a huge stock mar­ket rally that gen­er­ated un­be­liev­able vol­umes of new wealth for in­vestors and en­trepreneurs.

To­day, this hard-money think­ing is nowhere to be found in of­fi­cial Wash­ing­ton. Yes, the Fed can pro­duce new money. But no, it can’t pro­duce new jobs and growth in any per­ma­nent sense. What does? Lim­ited spend­ing, flat tax rates, min­i­mal reg­u­la­tion and sta­ble money.

Now where’s the next great Amer­i­can leader to re­vive and re­store this pro-growth model?

Lawrence Kud­low is a na­tion­ally syn­di­cated colum­nist.

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