KUDLOW'S MONEY POLITIC$
PRO-GROWTH, STRONG DEFENSE, VIRTUOUS VALUES, BUSINESS, AND STOCKS

WEDNESDAY, DECEMBER 19, 2007

Kudlow 101: Milton Friedman Rides Again

There are fresh signs that we are on the verge of a major inflationary plunge.

We recently took a closer look at the relationship between M1 and inflation. Here’s what we found. Since the early 1990s this relationship has improved dramatically. And over the last six years or so, this correlation has remained strong. This surprised me. I had not looked at this in a long time. There is a clear link to prices and a plunging future inflation rate. This is classic Friedman monetarism.

Take a look at this picture of the CPI inflation rate:

Contrary to the recent flare-up of inflation last week, we are actually going to get a somewhat lower inflation rate this year of around 2.7 percent. Inflation was running at 3.2 percent in 2006 and 3.4 percent in 2005. So even though we had a bad number in November, calendar year-to-date, it’s actually lower than the prior two years.

Now let’s take a look at the M1 money supply. M1 is simply currency in circulation plus other checkable deposits. Milton Friedman used this. And it also happens to be part of the reason why inflation is coming down.


In the beginning of this decade, M1 was rising rather rapidly. It came in at 3.3 percent back in 2001, rose again the following year, and eventually peaked at 6.5 percent in 2003. But it has been coming down ever since. In fact, M1 came in at 2.0 percent in 2005, 0.2 percent in 2006, and calendar year-to-date, it’s actually in negative territory at minus 0.3 percent.

Money is the ultimate cause of inflation. Inflation is everywhere a monetary phenomenon. Therefore, since M1 growth has essentially collapsed, we are now looking at a big drop in CPI inflation.

Take a close look at this chart. With a two-year time lag, we’re looking at a roughly 1.5 percent inflation rate. Maybe even less.


As University of Michigan economist and Carpe Diem blogger Mark Perry told me, this relationship is not a direct, one-to-one relationship. In other words, there is about a 2 or 3-year lag, since money growth takes this amount of time before it has its final impact on prices.

There is no perfect, silver-bullet, forecasting device for inflation. And while this monetarist model revived by Mark Perry is interesting and statistically significant, no one can say for sure that this is the ultimate method of predicting inflation. That said, money still looks tight from the standpoint of an inverted yield curve and a near zero growth of the monetary base.

If these views are correct, now is the time to sell gold and buy the dollar.

Tomorrow we’ll take a look at the velocity (or turnover rate) of money and compare that to gold in the context of this monetary approach. Monetarist models of inflation have had their ups and downs over last 30 years, but so have commodity models of inflation. The trick is to use some common sense to evaluate the whole story.

But the key point here is that inflation looks like it’s going to plunge.

The Problem with many Rural Think Tanks, Blogs, and University Studies!

I thought I should point out a caution about some things that are listed on my BLOG.

I have a lot of blogs, university papers, and rural “think tanks” listed on my web page. In fact, I intend to add more when I have time. It is not an endorsement of all the thoughts and ideas, but rather a compilation of places I look at for information.

The problem with a lot of the rural advocacy groups is their reliance on state or federal government for their hope and direction. Many get their paychecks from the numerous state and federal legislative bills, so understand the perspective.

Yet, I find the best direction always comes from the ideas and actions of people that live in the community. It requires leadership, listening, and planning all of which do not have to cost much.

Government is in most cases the real barrier to success in small town America. Politicians are picking winners and losers through various incentives and tax schemes…..not letting the real market work. It means you have to try and work within the dysfunctional system, but hopefully pushing for real change at the levels of government inhibiting real innovation and change.

So as you visit the links and blogs realize you the run the gamete on ideas from left to right. However, I am confident you will find the information informative and useful.

Minnesota and the New Ruralism: Planning in Rurality

A good power point specific to Minnesota with demographics. I am quite confident there is a lot of material that is similar to any small city around this great country of ours.

This is further evidence of how a new way of thinking is required because a lot has changed in non-metro areas including: population, economics, services, and expectations.

By Benjamin Winchester
University of Minnesota Morris
Coordinator, Data Analysis & Research
September 30, 2004

www.morris.umn.edu/services/cst/pubs/MN_New_Ruralism_MNAPA_2004.ppt

Have a Happy & Safe New Year!!!!!!!!

The Mayor

Who Will Not Win the Republican Nomination!!!

The Republican side is much more complicated because of the confusion and contentious relationships that have emerged in a humbled Republican Party.

The Fiscal Conservatives have started calling Social Conservatives names relating to intolerance. The Social Conservatives continue to splinter among many different candidates, and have not united behind a single candidate as in past elections. The National Security wing of the party is just catching their breath and emerging from behind the rocks after seeing the surge start to work in Iraq. Yet I do think Republicans can win the Presidency.

The polls show anyone in the Republican Party can win right now. However if the Republican Party will stay intact a few candidates will not win.

Rather than predicting a winner at this point I will predict two losers with a few more predictions to follow:

Giuliani will not win the Republican Nomination. He needs social conservatives to win a general election, and even though Pat Robertson endorsed him he will lose. His strategy of not planning to win in the primary season until Florida is a dumb a strategy. He should have at minimum built the foundation in the early primaries that he did not have to win just place a strong third or SOMETHING in a state like New Hampshire. McCain will emerge as the alternative to Giuliani in Florida and states like it.

Dead Fred will also not win the Nomination. I hate to say it but the best part of his run for President was when he was not in the race. I think he is the truest conservative from his voting record in the Senate, but his campaign has been less than inspiring or "Reganesque.

Hillary will win the Nomination!!!

I think if you look at the numbers (Realclearpolitics.com) Hillary remains in good shape for the Democratic Nomination. National polls show it is not close at this point among Democrats. The polls have not moved even though people are now paying closer attention nationally.

Even in Iowa and New Hampshire we are starting to see that Obama may have peaked to soon. The statistics don't look good at this point for the junior Senator from Illinois even though the media seems to be pumping a horse race. (Purely for the ratings and who can blame them!!)

For Obama to stay alive he needs to run the table on the first three contests to have a true shot at the Democratic nomination. I think in the current environment that will be impossible for the Senator, and he will be the future Vice-Presidential Nominee on the Democratic Ticket.

The Service Industry, Technology, Rural Minnesota, JOBZ, and the need for Innovation

This letter is a result of being the Mayor of Clarissa, and dealing with all levels of government from the state level right down to our locally elected officials. More over, it is a result of speaking with people down at MN DEED (Department of Employment and Economic Development) recently regarding infrastructure grants and policy problems that currently exist.

My inquiry started in regards to developing industrial parks in Northern Todd County. It is important that our area be competitive in the JOBZ program currently offered by the State of Minnesota. JOBZ I have felt is an initial attempt to strengthen rural Minnesota and the manufacturing sector at large.

However, I now believe JOBZ needs some major modifications. I believe this is vital to the health of metro and rural areas of Minnesota.

There have been a number of small industries that have shut their doors recently in Todd and Wadena County. In Clarissa we dodged a major blow to our local economy as we were able to bring in a new manufacturing business soon after the loss of the current occupant to Michigan.

A personal example:

Right now cities in our area all have industrial parks that were designated JOBZ, however, many remain undeveloped without the proper utilities and infrastructure to support such a business. (Just to give you an idea Clarissa currently rents out our industrial park to a farmer who plants corn on it so we can control the weeds during the summer.)

When speaking with DEED they informed me they will not give a city like Clarissa a 50/50 matching grant to develop an industrial park unless you have an “iron clad” commitment from a business to locate there. My point with DEED and many of our state leaders is a business (correctly) won’t locate to an industrial park that does not have the proper infrastructure and utilities.

The result is small communities do not have the tax-base to install such infrastructure. Hence we lose out to the larger cities that have the capacity to make that initial investment. In addition the large cities are getting to use the JOBZ benefits (taxpayer dollars) that were never intended to be granted initially. What was intended as a help to out state Minnesota has now in some instances made it harder for rural Minnesota to complete.

There needs to be some common ground in this area to assist small cities in developing the capacity to attract industrial businesses. It is vital to the strength of rural Minnesota, but also helps the larger cities by reducing the stress of over development. Problems such as: traffic congestion, pollution, affordable housing, etc.

Statistics do show that moderate growth in this area is coming over the next quarter century. It is good news for an area like ours, but with the changes in our economy away from agriculture and manufacturing a new way of thinking and planning for the future is required. I hope to offer a few ideas and solutions.

Ideas for advancing Minnesota:

· I think it is long over due to have some serious summits throughout the state that bring all levels of government together to hear ideas and solutions on a non-partisan basis. Minnesotans I talk with are tired of political affiliation and would like some honest dialogue.

· JOBZ needs to be reformed or dismantled. The current system has benefits and the need to support and aid our economy as it restructures is important. However, the situation as it stands now puts rural Minnesota at a distinct disadvantage. There needs to be some tiered levels in JOBZ that addresses big cities down to rural cities.

· Technology and the Service industry need to be supported and promoted. With the introduction of the Internet and technology a statewide comprehensive plan needs to be adopted and implemented. Rural communities can have a much diversified economy if technology infrastructure is implemented smartly and correctly.

• We need to expand our view beyond manufacturing to include the entire service industry. It represents 80% of private employment and economic output. We need to make sure we are addressing the needs of an industry rather than picking and choosing specific sectors.

· Realize that free markets work and government is largely inefficient. Government needs to promote growth and innovation. It can do this best by reducing barriers that inhibit growth.

· Supporting and transforming education. We need to get workers that are displaced from the old economy plugged into the new economy. This means our K-12, technical schools, and colleges need to continue to make sure course offerings match the jobs of the 21st century. We need classes that incentivize students to excel in areas of math and science.

(I would rather see a student paid to go to advanced math and science classes rather than the mundane jobs offered in many work study programs that any person is capable of doing.)

If the planning and implementation is done correctly it means greater opportunity for everyone. I also believe with the advances in technology it means a rural city like Clarissa can attract high paying technology and service industry jobs by offering a quality of life metro cities cannot.

To be competitive, however, we have to have broad partnerships across party lines, city and county boundaries, and personal biases. We also have to provide the right infrastructure and business environment. If the leadership from the state, county, and local officials cannot rise to the occasion it means business will pass us by and head to places that are.

American Ambassadors: Winning hearts and minds with Freedom!

My wife, Belene, spent most of her formative years growing up in the mountains of the Philippines. She often talks fondly of trips down to the American military bases where she was able to get a taste of American life and a reminder of home.

One memorable trip resulted in a hat from a Marine. It is in many pictures and was an obvious sign of pride and patriotism. The American Armed Forces in its WWII structure were real influences in the areas they were based. Not only because of the military protection they offered, but more importantly by the reaching out of soldiers to the children, families, and communities around them. They were true ambassadors who often showed, in a real way, what makes our country great.

With a smaller and restructured military we have seen the American footprint change, and some of the unintended consequences appear to be a loss of true Ambassadors in many areas around the world.

President George W. Bush will (hopefully) be judged honestly by historians once he leaves office in just over a year. I have always held the belief that President Bush will be judged, and correctly so, that he got the big view of radical Islam correct and its threat to our way of life.

Even though “war is hell” and does not always go as smoothly as we would like. The big picture when you are the President is what counts.

Those against this war would try to call me a “Neo-con” for this belief, though I would disagree. (POINT OF MENTION: Hats off to the “Liberals” for finally coming up with a derogatory word that seems to stick to conservatives in a negative way. It has taken them since Dukakis to do it, but they have finally done it. Congrats!!)

Anyways……….

This past August my son and I were able to visit the peaceful (Sunni Muslim) country of Senegal. The nation of Senegal boasts a ninety-seven percent population of Islamic believers. As we traveled the countryside we were inundated with people who wanted to speak to Americans and get our view of what is going on in the world.

As we talked to many different people during our travels I started to understand that even in Islamic countries there is tremendous fear of the more radical forms of Islam that are spreading across Northern Africa. Senegalese people made it very clear that they considered themselves friends of Americans, and want us to be involved in countering the movements in their country toward radical Islam.

One official we met even introduced us to the largest land tortoise named “Bill Clinton” just to show us just how pro-American they really are.

While we drove around we noticed a tremendous amount of construction going up along the coastline of the Atlantic Ocean. My inquiry got me a long lecture on how Senegal is preparing for a world-wide Islamic conference next year. The government is building tremendous hotels and accommodations for leaders from all over the Islamic world including the more radical elements.

There was pride and fear evident as the discussions continued. There has been pressure on the government here to require teaching of the Koran in all schools, and some forms of more radical laws being passed. All of this to gain the favor of the Islamic leaders soon so to be arriving.

We were then able to visit some mosques and libraries that were built by Moammar Gaddafi, the Libyan dictator. The Libyan leader is in legacy building mode right now. He is building major mosques, libraries, and infrastructure throughout North Africa.

Other of the more radical Islamic governments are also following suit because money certainly has influence on power.

It all made me understand how important American influence overseas is even in the “insignificant” countries. I quickly realized how my son and I were ambassadors, and the only American many people will ever talk too or get to know.

I was disappointed at the lack of real American Ambassadorship in Senegal. It seems on some fronts we are losing ground. Even worse we may be losing the hearts and minds of many in these countries to a more radical element. Radical Islam has no problem pouring vast amounts of influence and money into these vulnerable areas of the world. America does need to restructure the State Department to coincide with the new military structure of the 21st Century.