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Truth Be Told
Alan Greenspan is charting the right monetary course.


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Larry Kudlow

Remember the old quiz show “To Tell The Truth”?

There were four panelists, who over the years included Polly Bergen, Kitty Carlisle, Ralph Bellamy, Tom Poston, Orson Bean, Peggy Cass, Johnny Carson, Bill Cullen, and Don Ameche. The panelists would interview three contestants, all of whom claimed to be the same person. Then they’d write down which contestant they believed was telling the truth. The moderator, originally Bud Collyer, then Garry Moore, would finally ask: “Will the real so-and-so please stand up?”

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I’m giving away my age, but for those of us who grew up in the Eisenhower ’50s, these are good memories. “To Tell The Truth” has been revived a few times over the years and there’s even a rendition of it that runs today. But the show I remember was of a most sophisticated sort. Back then everyone wore suits or cocktail dresses on the air. The topics, dare we say, were normal.

So let’s imagine yet another rendition of “To Tell The Truth,” and a sophisticated guest category in our Fed chairman Alan Greenspan. The topic — monetary policy — would not only be normal, it would be vital.

Now, if you were one of the four celebrity panelists, what would you ask the contestants? Remember, we’re looking for the real Alan Greenspan, a gentleman who has a reputation for being elusive.

If I were on panelist row, I’d ask about commodity prices — a key indicator of inflation and the health of the economy.

Many supply siders, including myself, believe in the commodity-price-rule approach to monetary policy. If the central bank had been injecting an excess of money into the economy, then rising commodity prices would tell the bank that it’s time to tighten policy — or withdraw cash from the system and raise interest rates. And if commodities were slumping badly, the bank would know to loosen, creating new money and lowering interest rates in order to avoid deflation.

Today, some economists believe that a recent commodity rally is telling the Fed that it must tighten policy to prevent excess money from starting a new round of inflation. But this is not my view. And I don’t think it’s Alan Greenspan’s.

While it is true that spot commodities — which reflect the actual prices businesses must pay for metals, raw industrials, food, livestock, et. al. — have increased nearly 7 percent over the past thirty days, the longer-term picture dating back to early 1996 shows a 29 percent drop. Which is the right measure to gauge monetary policy? Are commodities inflating or deflating? Will the real commodity picture please stand up?

Back to the all-new “To Tell The Truth.” I’d ask the three fed-chairman contestants which commodity measure they’d bank on. And the one who said they’re both right would be my choice for the real Alan Greenspan.

The big picture shows a nasty three-year commodity deflation from the end of 1995 to the end of 1998, then price stability from 1999 to 2001 with a new recessionary deflation starting in the second half of 2001. So, a commodity spike today does not necessarily mean we’re moving toward inflation. We still have a correction period to worry about. No — what we’re seeing today is a commodity rally away from deflation and back into a zone of price stability.

That’s the plain truth. Whether looking at the broad commodity index or individual commodities, the story is the same. There is no excess money in the system, and any immediate Fed tightening would be premature — at least based on a commodity-price-rule approach.

The real Alan Greenspan understands this perfectly well. He has learned from the mistaken over-tightening that occurred a couple of years ago. His new mantra is that business lacks “pricing power.” And you can’t say that if you think there’s inflation out there.

The real Alan Greenspan also recognizes that as technology-based productivity rises, prices tend to fall. More, he sees the natural spillover of tech innovation into every economic sector, including the very important financial-services sector.

In these circumstances, the Fed’s continued money-adding policy to finance the economic recovery is exactly right. In all likelihood there will be no need to change this policy until next year, and perhaps not even then.

To tell the truth, Alan Greenspan is charting the right monetary course.



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