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Wednesday, May 28, 2003

Zero-Inflation Dollar- In my Euro post yesterday, Larry Thompson requested commentary on Jack Kemp's latest Town Hall commentary. Kemp accurarly pegs the problems with the Euro in less-polite language that I used
Unfortunately, the threat facing the European economy stems not from deflation but from recession driven by bad governmental policies. Tax rates are far too high, inflexible labor laws are counterproductive and the welfare state is stifling. Europe's economy did not grow in the first quarter of this year, and there is little evidence of revived growth.
Kemp then changes gears, getting out his gold-bug stick and bashes the up-and-down trip the dollar has made in recent years. His final paragraphs are a good starting point for discussion.
I believe Treasury Secretary John Snow understands very well the necessity of replacing the so-called "strong-dollar policy" with a "stable-dollar policy." After all, we don't want a rising dollar or a falling dollar; we want a stable dollar. As Snow observed, we want the currency to be a good store of value and a currency people are willing to hold over time. In order to ensure a stable dollar of constant value, it has long been my view that the Fed should announce that it intends to maintain a fixed dollar price of gold, or if gold is politically incorrect, then announce that it will maintain a fixed dollar price of an index of price-sensitive commodities. Then the Fed can conduct monetary policy in such magnitude as necessary, to hit that price rule instead of always fighting the last monetary war.
I'm not sold on the idea of pegging monetary policy to commodity prices. Gold isn't the one and only commodity to be pegging to, for it tends to fluxuate too much with financial survivalist types buying gold to escape the coming economic colapse that is sure to come next year. If you're going to peg the dollar to hard assets, using a broader basket of commodities makes sence, even if it isn' as pure as the gold standard. However, much of our economy revolves around services and intelectual property that doesn't translate well into a commodity-based system. How would the price of oil or tin affect the cost of creating the next software program? Not much. Overall inflation should be the primary concern, with commodity prices a key but not determining factor. Kemp's plan might have worked better in the 70s, when our economy was more industrial, but inflation in a post-industrial economy might not be well measured by a basket of commodities.

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