Especially for Klahn.  Read it more than once until you understand it.


==============================

http://members.forbes.com/forbes/2007/0702/019.html

Fact and Comment
Do Bad Economic Ideas Ever Die?
Steve Forbes 07.02.07, 12:00 AM ET

Headlines are blaring about resurgent fears of inflation. Our publisher, 
Rich Karlgaard, has a lively debate going: Is the global flood of 
liquidity coming from the new savings of hundreds of millions of 
emerging middle classers around the world or from printing-press-happy 
central banks or from a combination of both?

Even before Ben Bernanke became Federal Reserve chairman, he was 
churning out papers about savings growing faster than investment 
opportunities. But he is wrong. You get excess capital only when 
politicians put obstacles in the way of opportunities. The classic case 
is the Great Depression. It was the horrific antitrade legislation, 
massive tax increases and other government blunders that were the 
genesis of the Depression in the 1930s. People and companies who had 
cash clutched it. Investment plummeted.

One can never say it enough: The only monetary measure you need look at 
is the price of gold. The yellow metal is constant in true value, a 
monetary version of the fixed North Star. The Federal Reserve's mistaken 
creation of excess money in 2003--04 was faithfully reflected in the 
price of gold, which went from the sound level of $350 to today's $650-
to-$700 range.

None of this is to gainsay the extraordinary things happening in the 
global economy, particularly the emergence of China, India and the 
formerly communist countries of central and eastern Europe. But that 
kind of prosperity and globalization does not create an overabundance of 
money. In the late 19th century globalization roared ahead while 
monetary policy was tight, which helped fuel agricultural dissent in the 
U.S. and William Jennings Bryan's antigold campaign of 1896. But in the 
U.S. and globally, vast amounts of new wealth were created, tens of 
millions of people saw living standards improve, inventions proliferated 
and life expectancy soared.

Monetary mistakes helped stoke the high-tech boom of the late 1990s, but 
the subsequent crash hardly negated the extraordinary power of the 
microchip and the Internet in reshaping the economy and creating an 
unimaginable array of new products and services.

The current concern about inflation sadly confirms the staying power of 
bad ideas, in this case the notion that economic growth creates 
inflation. The Phillips curve, which posits that there is a tradeoff 
between inflation and unemployment, has long been discredited by events 
and academic research. Since Ronald Reagan became President in 1981, for 
example, the U.S. has had a fantastic expansion, and inflation virtually 
disappeared until recently. Yet the media are full of stories and pundit 
head shaking that global capacity for producing goods could soon run 
out.

There is still astonishing confusion between price changes that reflect 
normal supply and demand and those that reflect monetary blunders. 
Moore's Law says that the real price of computing power decreases 50% 
every 18 months. That's productivity, not deflation. When ticket prices 
for a hot rock concert soar, that's not inflation, it's demand. However, 
when the cost of living in the U.S. and elsewhere sharply rose in the 
1970s, it was, as the late Milton Friedman never tired of pointing out, 
the result of excess money creation. Central bankers finally began to 
grasp that inflation was indeed a monetary phenomenon, but the lesson 
still hasn't stuck.

Investors need to realize that monetary misfires have political 
consequences, usually bad. The 1970s led to a malaise in the U.S., which 
paved the way for Jimmy Carter's election as President. He gutted our 
military; undermined the shah of Iran, which led to the current hideous 
Iranian regime; and engendered a passivity that emboldened the Soviet 
Union to invade Afghanistan, which in turn fueled the rise of the 
Taliban and al Qaeda. Interest rates rocketed, and the stock market 
tanked. The only good to come out of that period of inflation was a push 
for the deregulation of our trucking, railroad and airline industries.

This inflation, thankfully, is very mild compared with the last one, but 
it could well lead to political mischief in the form of protectionism 
and higher taxes. 

--- PCBoard (R) v15.3/M 10