Monday, August 28, 2006

Bernanke’s Hail Mary

Ben Bernanke didn’t talk about the Fed’s money policy in his speech at the big Fed summit in Jackson Hole, Wyoming last Friday. Instead, the former Princeton economics professor, now the nation’s new money maestro, spoke on the benefits of global free trade and globalization. But in terms of money creation, which is the Fed’s primary job, the new maestro has put the screws on.

This year the high-powered monetary base has flat-lined, compared to 6 percent growth last year. This means, the central bank has stopped creating new money, a decidedly counter-inflationary move that is stabilizing the value of those greenbacks in your wallets and purses.

This 2006 tight money Fed policy is also reducing expectations of future inflation, according to a number of inflation-sensitive market price indicators.

To wit: long-term bond rates have dropped to 4.80 percent from 5.25 percent earlier this summer. The Treasury market yield curve now is inverted, meaning that long-term rates are below short-term rates, an unnatural shape that signifies tight money. Gold prices around $625 are about a hundred bucks less than their peak last spring.

And here’s another interesting sideline to this story: unleaded gas futures prices have slipped down to $1.79, as Hurricane Ernesto fizzles. My rule of thumb, connecting pump prices to the futures market, is to simply add a dollar for taxes and carrying charges. This means pump prices head to $2.79 in a few weeks, another thirteen cents or so from current national averages. There’s Republican mid-term congressional election content in these numbers.

Putting all this together, inflation will remain under control as Ben Bernanke’s global economy keeps producing more goods to absorb a less accommodative money supply. This is right out of Milton Friedman’s playbook, as recently discussed by Art Laffer in last week’s Wall Street Journal.

Finally, stock markets are moving back to their five-year highs, a signal that investors are voting for a continued economic growth scenario rather than a recession. The Investor Class likes what maestro Bernanke is doing, and strongly suspects that the Fed’s highly watched target rate—now 5.25 percent—will not be raised anymore this year.

Give Bernanke credit. And say a Hail Mary for the GOP.