Respectfully Disagreeing with Jerry Bowyer

By John Tamny

In the summer of 2001 the price of gold hit a modern low of $253/ounce. To various economic commentators with free-market leanings, the gold price signaled a monetary deflation whereby dollar debt-holders were suddenly being forced to pay back dollars far more expensive than the ones they borrowed when gold traded at a higher price. That the U.S. economy experienced a shallow recession at the time (where many heavily indebted companies went bankrupt) confirmed for many that the Fed was too tight.

That the Federal Reserve had been cutting rates alongside a strengthening dollar was unimportant to many who followed gold, in that a loose or tight Fed was not a function of a low or high nominal rate set by our central bank, but instead a function of this objective market price. Why gold? Due to its unique stock/flow characteristics, gold has for thousands of years served as money and a money measure for paper currencies thanks to its impressive stability in real terms. When gold’s market price moves, this is not a function of gold’s real price changing, but instead an indication of the changing real values of the currencies in which it’s priced.

For evidence of this, we can look to changes in the gold price itself in dollars, British pounds and euros since 2001. Many have suggested that Chinese and Indian demand for luxury baubles explains gold’s impressive rise in recent years, but when we look at gold in the aforementioned currencies, a different story emerges. While gold has risen 87 percent and 112 percent in euros and pounds since the summer of 2001, it has risen 192 percent in dollars. To gold watchers, and beyond that those who view inflation as monetary in nature, gold’s substantial rise in dollars is first-order evidence of an inflation in our midst.

By the spring of 2004 gold was bouncing around in the high $300/low $400 range, at which point an informal debate began among various free-market commentators about how this incipient inflation should be arrested. Though there was general agreement that the dollar’s fall (and gold’s rise) was alarming, there emerged quite a bit of controversy about what should be done to fix the problem.

Some argued that a rising Fed funds rate would arrest the dollar’s fall, some said the Fed need only sell assets from its portfolio to reduce the monetary base with an eye on the gold price amidst freely floating rates, and some said the monetary authorities need only make plain their unhappiness with the dollar’s direction in such a way that the markets themselves would reverse its fall. And while an even greater debate about the efficacy of rate targeting followed in recent years, there was still general agreement that the gold price signaled inflation; the notable exception being free-market economic commentator Jerry Bowyer.

To Bowyer, quiescent government measures of inflation such as the consumer price index (CPI) indicate that the gold signal lacks some of its past relevancy. Even with year-over-year CPI running at 3.5 percent (meaning the US price level would double in 20 years), Bowyer stands by his assertion that inflation at present is not a problem.

So while various gold types will occasionally mention the CPI compared to Bowyer’s frequent mentions, it’s not an indicator thought to be very useful. For one, as with all government measures of inflation and growth, the CPI has “rear-view mirror” qualities in that it only indicates what’s happened after the fact. Conversely, commodities such as gold, which are priced in the spot market in dollars, tell us in real time whether dollars are losing or gaining value.

As occasional gold advocate Alan Greenspan once noted in Congressional testimony, inflation strikes with a lag, so it’s necessary to utilize forward looking indicators such as gold, forex, and the yield curve. The dollar price of gold and the dollar’s value against foreign currencies are surely indicating inflation, while yields on Treasuries suggest a more optimistic outlook. Bowyer points to the latter to bolster his case, but then going back to the ‘70s, bond yields have frequently lagged gold and foreign exchange when pricing in the dollar’s direction.

Indeed, Treasury yields didn’t immediately adjust upward to dollar weakness in the aftermath of the breakdown of Bretton Woods. Furthermore, it took twenty years for yields to adjust downward once inflation was arrested beginning in the early ‘80s. And despite impressive dollar strength from 1997 to 2001, the latter never showed up in any material way in the yields of debt issued by the federal government. That Treasury yields seem sanguine today presumably speaks to market confidence that the Fed/Treasury are long-term credible when it comes to inflation.

Back to lagging government measures of inflation, in addition to timing issues, indices such as CPI track consumer prices without much acknowledgment of changes in the goods we buy. Bretton Woods Research’s chief economist Paul Hoffmeister has noted a recent announcement from General Mills that it will keep the price of its boxes of cereal steady, all the while reducing the amount of cereal in each box. Forbes publisher Steve Forbes recently wrote of the pastries sold at Starbucks, which while priced the same, are smaller than those sold in years past. Shades of the 1970s. When we consider the computer Bowyer uses to type out his polemics minimizing the gold message, surely the one he uses today has evolved in terms of power and speed relative to ones he’s used in the past. On a yearly basis computers become increasingly powerful and cheap for reasons other than the dollar’s direction, such as innovation in technology and methods of production.

But beyond the clear difficulty that government bureaucrats face in accounting for non-monetary changes that surely impact prices, the targeting of consumer prices is anathema to many free-market writers. Consumer prices are essential signals used by producers in judging what goods we like and dislike, so when the Fed targets a number Bowyer deems sound, it distorts the price signals that insure a smoothly running economy.

Bowyer mocks those who have and continue to assert that the U.S. CPI will eventually reflect substantial dollar weakness (as though 3.5 percent inflation isn’t already problematic…), but in wrapping himself in the worst kind of outcome bias, he ignores what’s happening around the world in countries that maintain a currency link to the dollar. Many free market types (including this one) applaud the process by which countries allow us to export our monetary policy to their less experienced central bankers, but evidence that all is not well on the inflation front abroad speaks to problems here. And the evidence shows up in the very CPI numbers that Bowyer elevates as sound indicators of inflation.

Qatar currently links its riyal to the dollar, and its most recent measure of CPI inflation came in at 13 percent. China has most famously tied the value of its yuan to the dollar, and despite a 12 percent rise in the yuan against the dollar since July of 2005, China just announced its highest inflation reading (7 percent) in eleven years. Some who might defend Bowyer against these examples would say that Qatar is booming due to oil wealth, and China due to its re-embrace of capitalism such that economic growth itself is the root cause of inflation in certain dollar-linked countries. If we forget that Japan experienced yearly non-inflationary growth of 20 percent during its reconstruction in the post-WWII gold standard years, Bowyer himself would remind readers that Phillips-Curve logic is bogus; something he did in an August NRO piece (Phillips Head Screw Drivers).

If he chooses to ignore the examples emanating from countries on an implicit dollar standard, surely Bowyer sees inflation as to some degree reflecting a decline in the monetary standard. And with oil a commodity whose price is set in world markets, its 216 percent rise in dollars (versus 105 and 130 percent in euros and pounds) since 2001 is once again suggesting a not-insignificant, inflationary decline in the value of the dollar.

Rather than address evidence that the U.S. CPI is flawed, or at the very least measured in goods particularly sticky in terms of price, Bowyer mocks what he deems “pretzel logic” on the part of stable-currency advocates. He does this all the while mis-reading what many gold types consider “tightness” on the part of our Federal Reserve. Tightness is not a number set by the Fed, but instead reveals itself irrespective of rates in the price of gold.

Still, if he chooses to de-emphasize the gold signal while concentrating on CPI and other more quiescent government measures of inflation, Bowyer might look at the anecdotal evidence. Inflationary episodes share certain characteristics that always seem to reveal themselves when a country’s currency is losing value. Much like the inflationary ‘70s when there was a flight to hard assets such as housing and art alongside suddenly “scarce” commodities, we’ve experienced much the same in recent years. And just as the weak dollar played a huge role in the failed presidencies of Nixon and Carter, so it weighs on President Bush.

The late Hall of Fame football coach Bill Walsh used to say that you could judge a quarterback’s performance by simply watching his footwork to the exclusion of everything else. With the benefit of hindsight, we can now say that the successful, popular presidencies since 1971 were those where the dollar resided in non-inflationary territory. Conversely, the weak-dollar presidents left with low approval ratings. If the economy were really as good, and free of inflation as he argues, would George W. Bush really be this unpopular?

With or without conversion to a gold-centric money model, Bowyer will continue to write important opinion pieces on the economic growth that results when taxes and inflation are low, and trade is free. Still, believer that he is that we should always be gaining wisdom from markets, he might begin to acknowledge market signals suggesting a not so sanguine inflation outlook; signals that might help explain the present malaise in the electorate.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading ( He can be reached at

Sponsored Links
John Tamny
Author Archive