Don't Believe The Hype—A New Economic Storm Is Brewing And Might Soon Pummel The U.S.

Forbes

Steve Forbes responds to improving indicators on inflation—but warns that despite growing hopes about the economy, more turbulence is probably about to hit.

Transcript

00:00 The consumer price index for October was flat and the producer price index was down.

00:05 But don't break out the champagne yet.

00:11 Hello I'm Steve Forbes and this is What's Ahead where you get the insights you need

00:15 to better navigate these turbulent times.

00:18 The consumer price index, the CPI, which came out Tuesday was surprisingly flat for October.

00:25 Certain other inflation measures have been improving, including the just released producer

00:30 price index.

00:31 A happy consensus has enveloped financial markets.

00:35 No more Federal Reserve engineered interest rate rises.

00:38 Hopes grow that our central bank will start lowering them during the first half of 2024.

00:44 Stocks and bonds are booming in anticipation.

00:47 But don't get too giddy too quickly.

00:50 One note of caution is that the CPI was helped mightily by the significant drop in gasoline

00:56 prices.

00:57 A deeper dive into the latest CPI shows that a subset, beloved at the moment by the Fed,

01:03 is up more than 3% and more worryingly is going up, not down.

01:09 This is an exception to what other gauges are showing.

01:12 But the Fed probably won't ease up until the economy is visibly slumping.

01:17 More ominously long term is this dark cloud.

01:21 The Fed Reserve and almost all but a handful of economists don't understand a profound

01:26 truth.

01:28 Rising prices are a symptom, a result of inflation, not the cause.

01:33 Misunderstanding inflation means big trouble down the road.

01:37 The definition of inflation is straightforward, reducing the value of a currency, usually

01:43 by creating too much of it.

01:45 When you devalue the dollar, nominal costs go up.

01:49 People get less for their money.

01:51 The Fed Reserve and other central banks believe in the Phillips curve.

01:55 The curve posits that low unemployment breeds more inflation.

01:59 If you want less inflation, you must have higher unemployment.

02:03 Depressing the economy will bring down prices as people and businesses buy less.

02:08 But if the dollar is not stable, trouble will return when the Fed takes its boot off the

02:13 neck of the economy.

02:15 Real world experience shows the Phillips curve is nonsense.

02:19 Nonetheless it is wholly red at the Fed.

02:22 Instead of clutching the curve, the Fed Reserve should announce that its goal is a sound stable

02:28 dollar rather than trying to control the economy's direction by manipulating interest rates.

02:35 The U.S. achieved dollar stability by linking its value to gold until the 1970s at $35 an

02:41 ounce.

02:42 For a variety of reasons, gold keeps its intrinsic value better than anything else.

02:47 From the early 1980s to the late 1990s, Fed actions were guided by commodity prices, which

02:54 can be very sensitive to changes in currency values, as well as gold.

02:59 We're not going back to a gold standard any time soon because today's authorities wouldn't

03:04 know how to run one.

03:06 But our central bank could achieve a good deal of dollar stability by repeating what

03:11 it did from the early 1980s to the late 1990s.

03:15 Let's hope it does so.

03:17 I'm Steve Forbes.

03:18 Thanks for listening.

03:19 Do send in your comments and suggestions.

03:21 I look forward to being with you soon again.

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