15 August 2001
Memo To: Jude Wanniski
From: Ed Bugos
With all due respect, a concept of
yours with which I have grave difficulty is the idea of monetary
deflation. Your use of the term is simply incorrect.
A monetary deflation relates to a
contraction in the money supply. Whether caused by or resulting
from a decline in prices is a matter of debate, but when you ascribe
the word monetary then you surely must be referring to that effect
on prices from a contracton in the money supply, or the effect on
the money supply of a decline in prices, and not simply the volatile
external (ephemeral) value of money; that very value which is determined
by the manipulative policies which you yourself criticize each week.
A decline in nominal prices resulting
from a manipulative currency policy whose objective is to steal
foreign purchasing power and export domestic inflation is by no
means a real, or even sustainable, deflation. It is certainly not
a monetary deflation. It is a mock deflation, and it provides the
disguise for rampant monetary confiscation.
Neither is a broad decline in prices
as the result of productivity gain a monetary deflation for that
matter, it is profit, but true profit, not confiscated wealth.
A decline in some prices and a rise
in others is what? It is the objective of dollar policy. In which
historical episode of monetary deflation had wages ever risen as
fast as they have this past 3, 5, or 10 years? Or which episode
of monetary deflation has ever witnessed a rise in oil prices, or
asset prices, such as we have seen this past decade? How can there
be a deflation when the money supply has been growing at between
7% and 11% annually since 1997?
Yet, while we are diametrically opposed
on this issue, you still manage to come to the same conclusion,
that the value of the almighty dollar is a Machiavellian manifestation
of political power, rather than a product of the free market, and
furthermore, that this is bad for capitalism. We are also in agreement
with your views of the floating exchange rate mechanism.
It is understandable why our conclusions
converge: because whether the policies of the Fed are inflationary
or deflationary, matters little to the fact that they interfere
with the free market price mechanism.
Still, we differ sharply with your
conclusion of deflation, which in our opinion is virtually impossible
under a floating exchange rate mechanism anchored by an ignorant
(and arrogant) democracy. Please see "There
is No SafeHaven," where we list the seven reasons that the Fed
is in an inflation trap. Your unwarranted and widely shared fear
of deflation is one of them.
In your memo to Greenspan on "Our
Floating Unit of Account," you said:
"The average price of gold over
the last 10 years has been roughly $350, but it is now around
$270, a clear indication the Fed has again been engaged in deflationary
policies that have accumulated over time."
Your assumption is that gold is as
effective an indicator of inflation as ever. We have noticed this
in your writing frequently, and wonder how it is that you can acknowledge
the Treasury's manipulative dollar politics, yet discount the notion
that gold has been manipulated. Just because no one can prove it,
does not mean that the investor, or policy maker, ought not take
it into account, especially when the circumstantial evidence is
The declining value in the price
of gold over the past 5 years is out of sync with the inflationary
realities in the US economy. In fact, there is no broad deflation
in prices anywhere, yet gold declines. There is no contraction in
money supply or credit growth, yet gold declines. There has yet
to be a contraction in output, yet gold declines. Nominal prices
rise, but then only get excluded from the data when they rise to
Where is the monetary deflation?
Is it only by observing the strong foreign exchange value of the
dollar and the decline in gold prices that you come to this conclusion?
Would your conclusion be different if all else were equal, but the
price of gold was above $400 and the dollar index below 100? Is
there anywhere else, besides the price of gold, where you derive
your deflationary conclusion?
Furthermore, in terms of gold, most
prices are up since 1990, and even 1980. The CRB, for instance,
valued in the quantity of gold required to purchase a unit of the
index, has inflated by 31% since 1990. Under a proper gold standard,
this is how inflation is measured, in terms of gold, at least if
it is to be the standard. As an example of the way in which currency
politics, not just taxes, influence inflation, consider that when
the US abandoned its bimetallic ratio in favor of the monometallic
gold standard, in the late 19th century, the result was a silver
inflation as the excess unwanted metal couldn't fetch a decent basket
But we know that gold is not perceived
as a monetary standard, or an inflation indicator for that matter,
today. And while prices measured in dollar terms, such as those
measured by various price indexes, have risen in the past ten years,
even after the public's focus has been dragged right to the corest
of the corest data, the CRB is down 15%, in dollar terms.
The world is on a dollar standard.
The Fed's policies have been inflationary, but the inflation has
been managed by an aggressive dollar policy. Such a currency policy
cannot be sustainable without one day creating massive shortages
in the physical economy. Thus, even in this regard, in the way that
it interferes with the free market, and misallocates global resources,
the manipulative dollar policy is setting the stage for a massive
dollar inflation to spread beyond just the price of oil.
Consider, where those dollar denominated
numbers would be if the Machiavellian dollar did not exist and the
gold market was not manipulated? They would be higher of course,
reflecting the truth, that the Fed's policies have been highly inflationary,
rather than deflationary.
This is opposite to the view that
the Fed has been fighting the forces of deflation, or disinflation,
for the past 20 years, we know that. But you know that too. In fact,
you agree with us, but won't admit it. If the dollar is a political
animal, opposing the forces of the free market, then it is not deflation
that is making it appear more valuable relative to the price of
I do not see any monetary deflation
either now, in the recent past, or in the near future. Where do
you see it besides in the one commodity that is an obvious target
of Machiavellian politics?
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