April 21, 2004

Kudlow -- there's too much money. "As a nod to strong price trends in gold and commodities, as well as rising bond yields � all traditional harbingers of excess liquidity and mounting inflation � many investors would like to see a bit less money created by the central bank. I believe that a few small restraining steps now will save the Fed, the stock market, and the economy a lot of high-interest-rate angst down the road. Up to now the Fed has ignored forward-looking commodity- and financial-price signals in favor of an �output gap� model of inflation, which argues against broad price increases so long as under-utilized resources and idle capacity exist in the economy. This output-gap approach is reminiscent of the �cost-push� arguments of the inflationary 1970s, whereby wages, not money, were fingered as the principal inflation culprit. The Fed�s output-gap argument, while dressed in new scientific garb, also looks a lot like the old Phillips-curve tradeoff between falling unemployment and rising inflation. That also failed dismally as a policy guide during the �70s. Why monetary decision-makers fight the overwhelming historical evidence that inflation is always a monetary problem is hard to fathom, yet they do .. ". More LARRY KUDLOW. Posted by Greg Ransom | TrackBack