text: 15 August 2001
  Memo To: Jude Wanniski
  From: Ed Bugos
  With all due respect, a concept of
  yours with which I have grave difficulty is the idea of monetary
  deflation. Your use of the term is simply incorrect.
  A monetary deflation relates to a
  contraction in the money supply. Whether caused by or resulting
  from a decline in prices is a matter of debate, but when you ascribe
  the word monetary then you surely must be referring to that effect
  on prices from a contracton in the money supply, or the effect on
  the money supply of a decline in prices, and not simply the volatile
  external (ephemeral) value of money; that very value which is determined
  by the manipulative policies which you yourself criticize each week.
  A decline in nominal prices resulting
  from a manipulative currency policy whose objective is to steal
  foreign purchasing power and export domestic inflation is by no
  means a real, or even sustainable, deflation. It is certainly not
  a monetary deflation. It is a mock deflation, and it provides the
  disguise for rampant monetary confiscation.
  Neither is a broad decline in prices
  as the result of productivity gain a monetary deflation for that
  matter, it is profit, but true profit, not confiscated wealth.
  A decline in some prices and a rise
  in others is what? It is the objective of dollar policy. In which
  historical episode of monetary deflation had wages ever risen as
  fast as they have this past 3, 5, or 10 years? Or which episode
  of monetary deflation has ever witnessed a rise in oil prices, or
  asset prices, such as we have seen this past decade? How can there
  be a deflation when the money supply has been growing at between
  7% and 11% annually since 1997?
  Yet, while we are diametrically opposed
  on this issue, you still manage to come to the same conclusion,
  that the value of the almighty dollar is a Machiavellian manifestation
  of political power, rather than a product of the free market, and
  furthermore, that this is bad for capitalism. We are also in agreement
  with your views of the floating exchange rate mechanism.
  It is understandable why our conclusions
  converge: because whether the policies of the Fed are inflationary
  or deflationary, matters little to the fact that they interfere
  with the free market price mechanism.
  Still, we differ sharply with your
  conclusion of deflation, which in our opinion is virtually impossible
  under a floating exchange rate mechanism anchored by an ignorant
  (and arrogant) democracy. Please see "There
  is No SafeHaven," where we list the seven reasons that the Fed
  is in an inflation trap. Your unwarranted and widely shared fear
  of deflation is one of them.
  In your memo to Greenspan on "Our
  Floating Unit of Account," you said:
  "The average price of gold over
  the last 10 years has been roughly $350, but it is now around
  $270, a clear indication the Fed has again been engaged in deflationary
  policies that have accumulated over time."
  Your assumption is that gold is as
  effective an indicator of inflation as ever. We have noticed this
  in your writing frequently, and wonder how it is that you can acknowledge
  the Treasury's manipulative dollar politics, yet discount the notion
  that gold has been manipulated. Just because no one can prove it,
  does not mean that the investor, or policy maker, ought not take
  it into account, especially when the circumstantial evidence is
  The declining value in the price
  of gold over the past 5 years is out of sync with the inflationary
  realities in the US economy. In fact, there is no broad deflation
  in prices anywhere, yet gold declines. There is no contraction in
  money supply or credit growth, yet gold declines. There has yet
  to be a contraction in output, yet gold declines. Nominal prices
  rise, but then only get excluded from the data when they rise to
  Where is the monetary deflation?
  Is it only by observing the strong foreign exchange value of the
  dollar and the decline in gold prices that you come to this conclusion?
  Would your conclusion be different if all else were equal, but the
  price of gold was above $400 and the dollar index below 100? Is
  there anywhere else, besides the price of gold, where you derive
  your deflationary conclusion?
  Furthermore, in terms of gold, most
  prices are up since 1990, and even 1980. The CRB, for instance,
  valued in the quantity of gold required to purchase a unit of the
  index, has inflated by 31% since 1990. Under a proper gold standard,
  this is how inflation is measured, in terms of gold, at least if
  it is to be the standard. As an example of the way in which currency
  politics, not just taxes, influence inflation, consider that when
  the US abandoned its bimetallic ratio in favor of the monometallic
  gold standard, in the late 19th century, the result was a silver
  inflation as the excess unwanted metal couldn't fetch a decent basket
  But we know that gold is not perceived
  as a monetary standard, or an inflation indicator for that matter,
  today. And while prices measured in dollar terms, such as those
  measured by various price indexes, have risen in the past ten years,
  even after the public's focus has been dragged right to the corest
  of the corest data, the CRB is down 15%, in dollar terms.
  The world is on a dollar standard.
  The Fed's policies have been inflationary, but the inflation has
  been managed by an aggressive dollar policy. Such a currency policy
  cannot be sustainable without one day creating massive shortages
  in the physical economy. Thus, even in this regard, in the way that
  it interferes with the free market, and misallocates global resources,
  the manipulative dollar policy is setting the stage for a massive
  dollar inflation to spread beyond just the price of oil.
  Consider, where those dollar denominated
  numbers would be if the Machiavellian dollar did not exist and the
  gold market was not manipulated? They would be higher of course,
  reflecting the truth, that the Fed's policies have been highly inflationary,
  rather than deflationary.
  This is opposite to the view that
  the Fed has been fighting the forces of deflation, or disinflation,
  for the past 20 years, we know that. But you know that too. In fact,
  you agree with us, but won't admit it. If the dollar is a political
  animal, opposing the forces of the free market, then it is not deflation
  that is making it appear more valuable relative to the price of
  I do not see any monetary deflation
  either now, in the recent past, or in the near future. Where do
  you see it besides in the one commodity that is an obvious target
  of Machiavellian politics?
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