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Inflation and Supply-Side Economics

October 14, 2005

In the latest money supply report, the M3 measure of money supply surpassed the psychological barrier of $10 trillion. It is up 7.1% over the latest year (52 weeks) and at an annual rate of 11.2% over the latest 13 weeks. Meanwhile, in a completely unrelated story, the consumer price index posted its biggest monthly (+1.2%) gain since 1980 and its biggest annual gain (+4.7%) since 1991.Of course, with a certain degree of deja vu we again saw how while the all-items index were higher then expected the markets still rallied because the "core index" was lower than expected. Meanwhile, supply-side economics keep delivering us more economic wisdom.

Larry Kudlow quotes approvingly Paul Hoffmeister, director of market strategy at the late Jude Wanniski's Polyconomics who now says that money supply increases (which he prefers to talk about as interest rate cuts) far from raising prices will actually lower them! You see, as it will "spur production", it will act to "soak up excess liquidity". This must qualify as the wackiest economic theory since fellow supply-sider Tom Nugent's idea that budget deficits increase savings.

In a confusion quite typical of supply-siders, he shortly thereafter however goes on to say that the Fed should lower the gold price by selling bonds. But selling bonds will uhm lower their price and thus raise interest rates, which of course would according to his theory inhibit production and thus increase prices. But I guess consistency is the hobgoblin of Misesian minds.

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