More On Kudlow's Ignorance: Gold and Inflation

Lawrence Kudlow has no degree in economics. He's a history major, but he portrays himself as some sort of economic expert on his CNBC show "Kudlow and Company" and in his columns which are picked up by National Review and Townhall. Kudlow is America's foremost economic pop-hack, and it's to the detriment of our society that he receives so much attention.

Here's an article http://tinyurl.com/38697k where Kudlow berates those who were predicting an economic recession saying that they would "windup with egg on their faces". Kudlow's column was dated December 7, 2007.  He predicts an ongoing "Bush Boom". He concludes, "There's no recession coming. The pessimistas [sic] were wrong. It's not going to happen... The Bush boom is alive and well."

We all know now that the National Bureau of Economic Research declared that the U.S. economic recession started in December, 2007, as Kudlow was writing his snide column. Predicting the economy is difficult, and even the brightest are wrong sometimes, but Kudlow would be wise to listen to real economists rather than criticizing them.  The fact is that in 2007 there were indicators of recession.  Kudlow addressed none of them in his column.

An issue that he has been harping on lately is inflation. Deflation was a major problem during the Great Depression, and some believe that the problem may have contributed to the prolongation of the Great Depression. Ben Bernanke is well aware of this as he has done extensive research on the subject. Bernanke has implemented an "easy money" policy which would be inflationary in a normal economy, but with banks reluctant to loan and cash heavy businesses reluctant to invest, the policy combats deflation.

But Kudlow sees inflation, not deflation, as the U.S. economy's greatest monetary threat. He has been extremely critical of Bernanke just as he was critical of those who were predicting a recession in December, 2007. He has even called for Bernanke to withdraw from his nomination for Fed Chief. Bernanke wisely ignored Kudlow's advice and was confirmed easily.

And he bases his fear of inflation on little more than the price of gold. Just this week http://tinyurl.com/2a7zcro Kudlow pointed to the rising price of gold as an indicator of inflation. Writes Kudlow:

"Gold prices are continuing to rally ... the surge is a bad economic omen... Rising gold prices are signaling higher inflation down the road..."

It is a sound economic theory that rising inflation causes the nominal price of gold to increase. Kudlow may have picked up on this by overhearing a conversation between two real economists or he may have  gotten it from a bumper sticker. Who knows? Kudlow's folly is that he is ignorant to the fact that other variables also cause the price of gold to increase; other factors that are currently in place in the current state of the economy.

Gold as an investment is typically looked at as a hedge, a hedge against inflation as well as a hedge against other threats. Put some of your savings in gold, and in the event of inflation, then the nominal value of said gold will increase. It's a hedge against inflation. It's also a hedge against risky investments and an unpredictable stock market.

Here is what Ben Bernanke said two weeks ago:

"I do think that there is a great deal of uncertainty and anxiety in financial markets right now and some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point."

Yes. That's why people are buying and holding onto gold: economic uncertainty. It's not inflation. What happens? The economy is struggling. Despite some modest economic growth over the past three quarters, the unemployment rate is close to the highest point since the Great Depression. Threats remain from home and abroad from foreclosures and underwater homes to heavily indebted European economies and heavily indebted consumers. Many have wisely moved some of their portfolio out of the stock market and into less risky treasury bonds and gold. The fact that many are moving their investments towards gold AND treasury bonds would indicate that inflation is not a major concern of investors right now because treasury bonds get creamed by high inflation.  Kudlow misread it.

Is inflation a concern for the future? Of course. Inflation is always a concern. If the Fed maintains its easy money policy in a normal economic environment, then you'd better believe that inflation would be a serious threat. But there are no current indicators of any threat of inflation. Kudlow, through his ignorance of basic economic principles, misread the indicators.