The Cato Institute is hosting a discussion this month of the extent to which monetary policy may have contributed to our current economic problems. In the lead essay that appeared on Monday, Professor Scott Sumner of Bentley University suggested that the Fed erred in allowing nominal GDP to grow as slowly as it did. My response appeared this morning. I agree that faster growth of nominal GDP would have been a good thing, but argue that, particularly if you start the clock in the fall of 2008, the Fed lacked the tools to prevent a decline in nominal GDP.

Here I excerpt part of my discussion.

Professor Sumner appeals to the equation of exchange, MV = PY,

where M is a measure of the money supply, V its velocity, and nominal GDP is written as the product of the overall price level (P)

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This post provides links to a number of interesting articles I have read over the past few days (while touring through Switzerland) that you may also enjoy.

• Samuel Brittan (Financial Times): A new guide for the perplexed, July 10, 2009. Attempts to make sense of the financial crisis often lead to even more confusion, writes Samuel Brittan. Here is an attempt to outline the main issues.

• Beat Balzli and Michaela Schiessl (Spiegel): Global banking economist warned of coming crisis, July 8, 2009. William White predicted the approaching financial crisis years before 2007’s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

• Janet Morrissey (Time): Advice from an economist who saw 1929, July 9, 2009. The Obama Administration should stop bailing out corporate disasters and

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The Friedman Effect: Is Another Bear Market Around the Corner?

by Dr. Mark Skousen, Advisory Panelist

In 1961, the great free-market economist Milton Friedman wrote a paper called “The Lag in Effect of Monetary Policy,” wherein he discovered a six- to nine-month delay in how long it would take for a change in monetary policy to be felt in the economy and the stock market.

Since then, it has been known as “The Friedman Effect.”

It’s important to understand the Friedman Effect because it can have dramatic impact on your investment decisions and your portfolio…

Milton Friedman & The Friedman Effect

Basically, Milton Friedman found that if the Fed switched from tight money to easy money, or vice versa, it would take about six months before you would see any change in the direction of the economy or Wall Street.

The Friedman Effect worked like clockwork during the financial

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“Little else is required,” Adam Smith, author of The Wealth of Nations, once remarked, “to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice; all the rest being brought about by the natural course of things.”

But this quintessentially laissez-faire perspective gains very little traction in modern-day America. In fact, it gains no traction whatsoever, except in a few fringey financial publications. Instead, America’s political elite conspires with the Wall Street bourgeoisie to lead the nation from the highest degree of affluence to the lowest barbarism.

The process begins innocently enough in the name of “crisis management,” as the political elite provides multi-trillion-dollar guarantees and bailouts to the Wall Street bourgeoisie. The proletariat embraces these bizarre, counterintuitive remedies because they genuinely believe these “remedies” contain curative powers. In other words, the proletariat believes that bureaucrats

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On April 20, I recommended the iShares SPDR Gold Trust ETF (NYSE:GLD). Since then, it has surged more than 10%. And while the price of gold may experience some short-term pullbacks, the U.S. government’s overly expansive fiscal policy could lead to a sharp inflationary spike that makes this exchange-traded fund a must-have investment.

Given the “green shoots” of economic growth that have appeared over the past few months, it looks as though the economy has managed to avoid a very dangerous deflationary spiral.

Indeed, last year’s financial turmoil wiped out major financial institutions, left the housing market in shambles, and sucked all of the air out of an outsized commodities bubble.  U.S. Federal Reserve Chairman Ben S. Bernanke was right to fear deflation.

A deflationary spiral like the one that nearly took root the U.S. economy is the worst nightmare of central bankers, because once you fall into it, you can

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This post provides links to some thought-provoking articles I have read over the past few days that you may also find of interest.

• Randall Forsyth (Barron’s): The market’s formula: a square-root rally, June 4, 2009. After nailing a 40% surge since early March, Doug Kass sees “potholes” in the road ahead.

• Donald Luskin (SmartMoney): Good news has arrived for investors, June 5, 2009. Three months ago, within days of the bottom in stocks, aggregate forward earnings started to turn around. It was less than a ringing endorsement at first. It just meant that the decline in earnings was now expected to get less bad - not that earnings would actually grow. But it was a perfect buy signal. And now aggregate forward earnings are on the verge of forecasting that earnings growth is back. It’s a buy signal. And if the pattern holds,

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The yield curve has recently become extremely steep. While there are many ways to measure the curve, the graph below is based on comparing the 10-year T-note with the one-year bill.The conventional way to measure the curve is to look at the difference between the long-term and short-term rate. I have always felt that this method, while useful, does not tell the whole story, since it does not reflect the overall level of interest rates. After all, long-term rates were at 10.93% in August of 1980 while short-term rates were 9.71%, for a spread of 1.22%.  Almost identical spreads were recorded in January 1991, April of 2001 and March of 2005. However, in 2005, long-term rates were only 4.59%.I would argue that the yield curve was much flatter in 1980 than in 2005. Therefore I have also included the ratio of long rates to short ...

Well, with the US$ down a half a cent, and decent gains in both platinum and palladium, you have to be pretty much brain dead not to have seen the footprints of the Gold Cartel in the gold and silver markets yesterday.

It all started the moment that Sydney closed on Monday afternoon…1:00 a.m. Monday in New York. From that point on, only Hong Kong [and the New York Bullion Banks] is a player. As I’ve said before, the New York banks [or their agents] can, and do, enter the markets whenever they want.

Gold sold off about five bucks with a smallish rally starting shortly after 12:00 noon in London. That lasted until the equity markets opened at 9:30 in New York…and then it was lights out…as gold got hit for $11 bucks. Once London closed for the day, the pressure was on again [both in Globex trading and electronic trading

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Insights from Jeremy Siegel: 3 Reasons Why The Dow Will Hit 10,000 in 2009

by Dr. Mark Skousen, Advisory Panelist

Wall Street has been debating the huge run-up in the Dow Jones Industrial Average.

Was March the beginning of a huge rally that will take the market to new highs? Have we witnessed the proverbial “dead-cat bounce?” The prognosticators have been unsure, uncertain and uncommittal about what they see coming next…

So let me make it clear where I stand: We are in the beginning of a new bull market that will carry us to 10,000 on the Dow by year’s-end - and new highs within a couple of years.

Yes, the recovery will be volatile. But now is the time to buy, despite the big run up…

No doubt there’s plenty of bad news out there - rising unemployment with no end in sight, threatened tax increases on capital gains

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Why invest in commodities? Two and a half billion people are going to live like Americans in the next 20 years and prices go up over time, that’s the nature of inflation.

We are in the middle of a global economic crisis and commodities are on sale. Buy commodities now while they are still cheap. When we finally emerge from this global economic crisis — prices will explode higher. I’m talking about another long-term bull market in commodities. Let me explain…

Inflation Will Push Commodities Prices Higher

Our Federal Reserve Chairman Ben Bernanke is an inflationist, which is an advocate of the policy of deliberate inflation achieved by increasing the supply of available currency and credit. They call him helicopter Ben because he once quoted a statement made by Milton Friedman, about using a “helicopter drop” of money into the economy to fight deflation.

Bernanke is a student of the causes of

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