As the year comes to a close so does the inter-Nicene argument between free-market economists about gold and inflation. Both are passing because of the same cause – the passage of too many months without the end of the world as we know it.
For those of you who are just now joining the discussion, here’s the background:
The founders of the supply-side economics movement, such as Arthur Laffer, believed that in order to predict future inflation, it was necessary to look at various markets. Some of their followers, in an excessive reaction to liberal disdain for gold, took things further and claimed that gold and gold alone held the key to the financial future. As a general -- not a universal -- rule, people who made their living in investment markets tended toward the first view and people who made their living as part of a movement (columnists, advocacy group staff, bloggers, etc.) held more tightly to the gold-only view.
As the Fed not-so-gradually hiked interest rates (that is, tightened money) from 2004 into 2006, the fissure widened. Gold continued to signal inflation, but interest rates did not. I first wrote about this in the Summer of 2005 for National Review Online (Supply vs. Supply), and again a year later in TCSDaily (The Financial Paradox of Our Time) The Fed continued to tighten, gold continued to rise, but inflation remained tame. From time to time, I’d write another article pointing to yet another month of low inflation and I’d get courteous emails from some (and angry emails from other) gold guys who would say that the inflation would show up soon or was ‘just beginning to show’, etc. But the inflation never did show. It peaked in 2004, right on schedule, one year after the Fed’s presses were at their hottest, and has stayed low-to-average ever since.
Some of the gold guys modified their position a little, acknowledging that perhaps other indicators, such as the behavior of bond investors, should be looked at. Some kicked the can down the road a little, good-naturedly, and with little fanfare, postponing their inflation predictions from ‘06 to ‘07, or changing their Fed hike forecasts to a later date. Some simply refrained from addressing predictions of exploding prices or cratered bond markets, as if they had never been uttered.