America’s New Economy

For the past several weeks, American investors have been jittery over the interest rate question. They worry that Alan Greenspan, the Chairman of the Federal Reserve, will only continue to raise interest rates in order to cool off the economy and ward off the outbreak of inflation.

I believe these fears of inflation are unwarranted. Sure, America’s Gross Domestic Product growth remains robust. Sure, America has the lowest unemployment rate in thirty years. Sure, oil prices are up. And, sure, the U.S. stock markets (especially the NASDAQ) remain high. But I believe America can still have uninterrupted economic growth without inflation.

The motto of the United States should be “growth without inflation.” America is in a new era with an entirely new economy. Inflation has been tame, and should continue to remain fully under control for many years to come.

What will control inflation? Most pundits would say higher interest rates and tighter monetary policy. Such experts point to Paul Volcker’s Federal Reserve policies during the Reagan years. Mr. Volcker tightened the money supply and raised interest rates. As a result, America’s inflation rate subsided. So the experts say.

As we enter into the new economy, there are a couple of reasons to doubt the future effectiveness of the U.S. Federal Reserve Board. First, the sheer amount of private global capital may eventually distort the power of the Fed to manipulate the financial markets. Second, since we are in a truly global economy, the Fed can no longer isolate the American economy as a distinct entity, in true-blue traditional parochial fashion.

The interest rate in Japan, for example, is far lower than the rate in the United States. Why can’t major U.S. corporations borrow money from Japanese banks (at a discounted rate) and thus circumvent Fed hikes? What will the world’s central banks do when we move into a truly global financial marketplace, where companies from all over the world, big and small alike, can shop for the best interest rates and import those loans back to their own home countries? Will we then have one global central bank? A central bank for every country in the world, tightening the global money supply, as it were?

High information technology–computers and the Internet–will eventually fully integrate the world’s markets. It will make growth without inflation possible, as it is already doing today. Rapid technological developments will also radically boost productivity, easing the pressure toward higher wages. The Internet and other related developments will go a long way toward permanently arresting inflation.

So what if unemployment rate is so low that it might boost wages by creating more demand for labor? It will not raise the cost of labor. Simply import the needed workers through an open immigration policy.

Better yet, eliminate all tariffs. Totally embrace free trade. Cut taxes. Global commercial competition should keep prices well in check.

As for the stock market, too many people believe that there is too much money chasing too few stocks. This is a profound misconception. Supply and demand eventually head toward economic equilibrium. The money will be invested and re-invested. Wealth will be created. In
the old days, the old marketing ploy was, “Find a need and fill it.” Today’s injunction is: “Imagine a desire and create it.” America is creating unprecedented new wealth. Gold as an inflation hedge is obsolete thinking.

We can have growth without inflation!