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The Economy’s Striking Gold
Is there a stock boom in the making?


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Larry Kudlow

The average chattering head will naturally blame the impending war in Iraq, the national strike in Venezuela, and world oil prices for the recent jump in the price of gold. But those are temporary events. Don’t buy into such short-sighted thinking.

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The prices of gold and industrial metals are rising because the Federal Reserve is sending needed cash into the economy. Gold and metals, of course, are key monetary and economic indicators, and their current surge confirms that the long, dark night of deflation has come to an end.

As long as the Federal Reserve keeps pumping the economy with sufficient new cash to boost investing, spending, and saving, it looks like we’re set for something of an economic boom next year.

Sure, not every economic indicator is pointing this way. For example, the closely watched “Fed spread” — the difference between the rate of the 2-year Treasury note and the federal funds interest rate — should be “wider.” But no system is perfect, especially when you are peering into the future.

Another good guess is that commodity markets, which include gold and metals, are surging in anticipation of a rising growth of money in the European, (non-Japan) Asian, and U.S. economies. Good technology news is coming out of Asia, suggesting economic recovery is on track in that part of the world, and China is still growing. Europe will take longer to rebound, but there are scattered anecdotal reports of replacement spending on new tech equipment in Europe’s private sector.

Poor fiscal policy in Europe, however, won’t help matters much. German Chancellor Gerhard Schroeder, who must think he’s the Mike Bloomberg of Europe, wants to jack up taxes. New York Mayor Mike Bloomberg, meanwhile, must believe he’s Mayor John Lindsay of old New York. Neither of these officials understand that you can’t tax your way into prosperity.

A much sounder prosperity model is coming from President George W. Bush, a favorite supply-side mole in the White House. Bush intends to reduce tax rates on business investment, including a big cut in the personal tax on dividends. The president must think he’s the Ronald Reagan of the 21st century. You know what? He just might be.

What George Bush — and Dick Cheney — seem to grasp is that a tighter linkage between risk and reward, between work and reward, and between investment and reward will spur economic growth. When greater supplies of risk capital circulate through an economy that is capable of growing — as is the case today — more business investment and labor services are offered to each market in response to heightened rewards. Simply put, when it pays more, after-tax, to work and invest, you get more work and investment.

Taxes matter, and money matters. Today, both appear to be moving in the right direction. Next year we could witness real GDP growth of 4% to 5% — up from this year’s 3% — with inflation at 2% or less. And if productivity continues at its current 5% pace, then the economy could easily grow at 6% or 7% next year. Think of what this will mean to top-line revenue sales, cash flows, and profits.

Is there a stock boom in the making? That could very well be the case.



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