Inflation is caused by too much money chasing too few goods; conversely, deflation is caused by a shortage of money in relation to available goods. Controlling the basic money supply in America is the U.S. Federal Reserve, whose stinginess three years ago in part through an overly high dollar contributed mightily to the deflation of stocks and the economy. But now, says Lawrence Kudlow, a “stable” dollar is all the recovering economy and stock market need.
However, recent actions by Treasury Secretary John Snow and the Group of Seven industrial nations suggest that global policymakers want the dollar to be worth less and buy less.
The world’s largest developed economies (the G-7) have called for flexible exchange rates rather than stable ones. Snow wants Japan and China to revalue the yen and the yuan upward making the U.S. dollar cheaper.
Spurred by lower tax rates, both the dollar and stocks appreciated late this summer. But since the G-7 declaration and Snow’s trip, it has given back its gains:
A cheaper dollar and excess money creation could cause spiking interest rates and inflation, short-circuiting the bull-market recovery, warns Kudlow.
Source: Lawrence Kudlow, Currency Cooks Jeopardize Jobs and Bush’s Re-election, Investor’s Business Daily, October 6, 2003.
For text http://www.washingtontimes.com/commentary/20031004-104223-3975r.htm
For more on Inflation http://www.ncpa.org/iss/eco/
FMF Policy Bulletin\7 October 2003
