Boom Insurance
Somehow we doubt too many money managers or even day-traders are heavily into sky-diving. You jump out of an airplane and let your body go into a downward free-fall, trusting yourself to pull the parachute cord at the right time. Everyone who does it says it's fun. But your body is one thing, your net worth something else. And with the market off 5.92% last week, and despite yesterday's 96 point recovery, a lot of earthbound traders are getting aggrieved that Alan Greenspan hadn't pulled the interest-rate cord for them earlier. Now they're worried it's "too late," that inflation is loose and they're headed for a fall.</br></br>It's not overwhelmingly clear to us that inflation's back. Maybe the wholesale price jump was only a blip. But bond traders, like canaries in a coal mine, are worth watching. There are enough worrisome signs around that this is a good moment to start thinking seriously about what's beyond the economic horizon for the U.S. economy. Robert Mundell, the supply-side economist who just won the Nobel Prize, already has the near term in mind. Interviewed last week he said, "I don't see any indication of a slowdown in the U.S. economy in the present, but I would not be surprised if that occurred next year."</br></br>Now when we say serious thinking about the near term, that includes Presidential candidates who will be running full tilt next year. What if inflation indeed shows up and the Fed feels impelled to tighten, even at risk of a downturn during the election campaign? If the person heading for the White House inherits a stalling U.S. economy, voters will want an answer. The answer isn't, "I plan to stay within the spending caps." That's a Beltway thing; it's not an economic strategy.</br></br>A real economic strategy is aimed at boosting the real economy, whose state of health is anticipated by stock and bond markets. In this world, what one watches are prices, which direct goods and investments to their most productive uses. Inflation disincentivizes that process, and the concern of late is that some relevant prices have been blipping upward.</br></br>The price of oil, for instance, has more than doubled the past 12 months, owing in great part to the oil-producing nations' ability this time to hang together on prices. They're helped by a number of factors, such as the participation of Mexico. But OPEC's success can also be read as a sign of accommodative monetary policies.