Finding The Gold: Bush Should Use An Executive Order To Cure Deflation.(A)

By Jude Wanniski

The reason there is so much confusion about the decline in the stock market and the growing signs of weakness in the economy is that we are experiencing a pure monetary deflation.

It is of the kind that has occurred only a few times in modern history. It cannot be cured by tax cuts or deep cuts in interest rates. That's the bad newsfor Republicans who want cuts in both and Democrats who prefer only the latter.

The good news is that once the malady is correctly diagnosed, it can easily be cured by a presidential executive order.

The monetary deflation began in November 1996, with very small declines in the dollar price of gold, from its plateau of $385 per troy ounce to today's $260.

In the classical, supply-side analytical model, the dollar price of gold goes up and down over time mainly to reflect small errors by the Federal Reserve as it mismatches the supply of dollar liquidity with the demand for it.

Before the dollar's gold link was broken by President Nixon in 1971, the supply of dollar liquidity automatically matched market demand at $35 per ounce. There was no opportunity for Fed errors in this regard to accumulate, asthey now have since 1996.