The National Review’s nuttiness over commodity price standards as guides for monetary policy has reached another low in the latest from John Tamny:
With the price of copper up over 300 percent since 2001, thefts of vases from gravesites, air conditioner components, gutters, and water pipes have risen as criminals have sought to sell the copper they contain at inflated prices. Just as “scarcity” and rising demand from India and China have been fingered as the cause of oil’s rise, both are cited as the reason for copper’s rally – not to mention subsequent criminal efforts to access it illegally. Monetary blunders are rarely mentioned in all this, despite the fact that since 2001 the nominal price rise in dollars of both copper and oil has been over double that registered in euros. Importantly, since commodities are priced in dollars, it seems that history often repeats itself every time the dollar loses value … Returning to current monetary blunders, every supposed oil and commodity “shock” since 1971 has occurred alongside a major drop in the value of the dollar versus gold, and subsequently all commodities. Since both oil and copper are world commodities, the fact that their prices have risen so substantially in dollars as opposed to euros in recent years makes plain the impact of dollar instability on the nominal price of commodities. It follows that these nominal changes impact investment in future commodity discoveries, and go far toward explaining why commodity prices have surged past their ten-year averages. Changes in the dollar’s value quickly register in the spot price of all commodities, with a rising currency driving away investment, and a falling currency attracting capital. This mal-investment does a lot to explain the “gluts” and “shocks” that have occurred since we left the gold standard in 1971. The above chart tracks the oil price since 1947 – and the contrast between the stable-dollar years of Bretton Woods (1944-1971) and the aftermath is pretty striking. Despite a major rebound of the world economy post-WWII, oil prices were largely flat up until 1971 …
OK, let’s stop right there and remind Mr. Tamny that we had an acceleration of inflation during the late 1960’s because monetary expansion accommodated an unwise policy of excessive fiscal stimulus aka the combination of the Vietnam War, the War on Poverty, and an inability to reverse the 1964 tax cut. Sort of remind you of the current situation: the Iraq War, an expensive Prescription Drug Benefit, and Bush’s zest for even more tax cuts. Thank goodness, the current Federal Reserve had adopted some monetary restraint. But put me down on record that I don’t want more monetary restraint regardless of the fact that the relative price of oil is indeed high. We might also remind Mr. Tamny of the fact that the inflation of the late 1960’s led to balance of payment issues, which precipitated Nixon’s 1971 decision to abandon Bretton Woods.
Nixon’s decision to engage in excessive aggregate demand expansion preceded the run-up in oil prices. By the time Gerald (no relation to George) Ford wanted to “Whip Inflation Now”, we were in a recession so Tamny’s claim that the Federal Reserve should have tried to peg the price of oil would have been a calamity in terms of macroeconomic stability.
But let’s also consider the implications of his call for pegging the price of oil with monetary policy by looking at the period of the first Iraq War – 1991. We were in a recession, which could be blamed on the Greenspan FED not increasing the money supply sufficiently as George H. W. Bush tried his dose of fiscal responsibility. Had the Greenspan FED listened to Tamny’s nonsense as the price of oil spiked, the Bush41 recession would have been much deeper and more prolonged.
Tamny seems to think commodity price volatility can be eliminated if we had the right monetary policy. He forgets that real shocks exist and any attempt to smooth nominal prices of commodities would result in great macroeconomic instability – not less. These National Review nitwits haven’t a clue as to what a rational approach to monetary policy happens to be, which is why you’ll likely see a call from easier monetary policy from one of these know-nothings right after they’ve called for tighter monetary policy.