Hooray for The New York Times Jude Wanniski October 13, 1998

Memo To: Howell Raines, NYT editorial page editor
From: Jude Wanniski
Re: Sunday's lead editorial, "Coping With Economic Crisis"

There are some nitpicks I would have with your lead editorial Sunday about the global economic crisis, but reading the paragraph concerning the Fed was the nicest thing that happened to me all weekend. To remind you: "A weaker dollar could lead to a higher reported inflation. If it does, that will not be a good reason for the Federal Reserve to back off from trying to stimulate the economy. It is deflation, not inflation, that threatens the world now, and that will not change until low commodity prices begin to move up in a convincing way."

The key phrase is the last, about commodity prices. That's what i monetary deflation is all about and your editorial gets it right! You don't say what the Fed should do to get commodity prices up, and I take that as a positive too, because the Fed is not likely to get commodity prices up by lowering interest rates. The object is not exactly to "stimulate the economy," as you put it. That phrase implies the government has the capacity to inspire economic activity by doing  something positive in this situation — the usual mistake is to think of the Fed "adding credit" by "lowering interest rates." This is not quite what is going on. The failure of the Fed during the past 20 months to supply liquidity being demanded by the world economy has caused the decline in commodity prices to levels that have bankrupt commodity producers and brought their creditors to their knees.
The first commodity that responds to a shortage of liquidity is gold, because of all commodities, it has the most monetary properties. Unless the Fed supplies SURPLUS liquidity now, the gold price will not rise,  nor will other commodity prices. In other words, the Fed must give the banking system more reserves than it is demanding now. Yes, prices would go up, but as long as the Fed does not overdo the addition of surplus reserves, there will be no re-ignition of inflation. Jack Kemp and Steve Forbes have suggested $325 gold as a minimum. I would prefer $350, to get all the deflation, but if the only two political people say $325, it is better than where we are now and I will defer to them. (They have other advisors who say gold should be lower than $325 and some who say $325, but no others at the moment who say $350.)

If you notice, The Wall Street Journal has not taken a position on the gold price. That's because editor Bob Bartley has been juggling conflicting views of several other supply-siders who have different theories on where gold should be. The closest he has come was in an August 18 editorial, "Time to Relax, Alan," in which he notes the gold price seems too low, at a point when it was at $285. Bob Mundell, who is the most highly regarded supply-side theoretician, says $300 is the low point that the financial system can stand, but he has indicated $325 would be more tolerable. I may have more of a concern for debtors and I'm more the empiricist than the theoretician. In watching gold for the last decade on a day-to-day basis, it has always struck me that the markets seem happiest at the $350 level.