The average chattering head will naturally blame the impending
war in Iraq, the national strike in Venezuela and world oil prices for the
recent jump in the price of gold. But those are temporary events. Don't buy
into such short-sighted thinking.
The prices of gold and industrial metals are rising because the
Federal Reserve is sending needed cash into the economy. Gold and metals, of
course, are key monetary and economic indicators, and their current surge
confirms that the long, dark night of deflation has come to an end.
As long as the Federal Reserve keeps pumping the economy with
sufficient new cash to boost investing, spending and saving, it looks like
we're set for something of an economic boom next year.
Sure, not every economic indicator is pointing this way. For
example, the closely watched "Fed spread" -- the difference between the rate
of the 2-year Treasury note and the federal funds interest rate -- should be
"wider." But no system is perfect, especially when you are peering into the
Another good guess is that commodity markets, which include gold
and metals, are surging in anticipation of a rising growth of money in the
European, (non-Japan) Asian and U.S. economies. Good technology news is
coming out of Asia, suggesting economic recovery is on track in that part of
the world, and China is still growing. Europe will take longer to rebound,
but there are scattered anecdotal reports of replacement spending on new
tech equipment in Europe's private sector.
Poor fiscal policy in Europe, however, won't help matters much.
German Chancellor Gerhard Schroeder, who must think he's the Mike Bloomberg
of Europe, wants to jack up taxes. New York Mayor Mike Bloomberg, meanwhile,
must believe he's Mayor John Lindsay of old New York. Neither of these
officials understands that you can't tax your way into prosperity.
A much sounder prosperity model is coming from President George
W. Bush. Bush intends to reduce tax rates on business investment, including
a big cut in the personal tax on dividends. The president must think he's
the Ronald Reagan of the 21st century. You know what? He just might be.
What George Bush -- and Dick Cheney -- seem to grasp is that a
tighter linkage between risk and reward, between work and reward, and
between investment and reward will spur economic growth. When greater
supplies of risk capital circulate through an economy that is capable of
growing -- as is the case today -- more business investment and labor
services are offered to each market in response to heightened rewards.
Simply put, when it pays more, after-tax, to work and invest, you get more
work and investment.
Taxes matter, and money matters. Today, both appear to be moving
in the right direction. Next year, we could witness real GDP growth of 4
percent to 5 percent -- up from this year's 3 percent -- with inflation at 2
percent or less. And if productivity continues at its current 5 percent
pace, then the economy could easily grow at 6 percent or 7 percent next
year. Think of what this will mean to top-line revenue sales, cash flows and
Is there a stock boom in the making? That could very well be the