There no longer seems to be any doubt that a new cycle of stronger investment and economic growth lies ahead. Evidence of this can be seen vividly in commodities. The price of gold, which was just over $300 a year ago, has recently run up nearly $25 to $367. At this stage of the nascent business-recovery cycle, a higher gold price serves as both an indicator of liquidity and a harbinger of faster-paced economic activity.
Silver, copper, platinum and the metals indexes are also on the rise. And the S&P stock market baskets for industrials and basic materials have moved into the top-five performing sectors. Along with consumer spending, these are all cyclical indicators of stronger future economic growth.
With 64 percent of the S&P 500 companies reporting second-quarter results so far, profits and earnings are up over year-ago levels and are coming in higher than expectations. Surely this good news is contributing to the improved economic-growth forecast that is taking place in the TIPS and commodity areas.
Before long, the mainstream media will give up the real-recovery-is-not-coming view. But rather than crediting the Bush tax cut, or the inherent dynamics of the productivity-enhanced economy, look for reporters to lurch into a new demand-side mantra that rising inflation is on the way.
This predictable growth-causes-inflation nonsense will again overlook several key points that are well established in economic history. First, lower tax rates are always associated with declining inflation. Second, increasing productivity raises real output and reduces inflation. Third, economic growth itself is usually associated with lower inflation. As with tax cuts and productivity, increased growth absorbs any inflationary excesses of liquidity that might exist in the financial system.
Indeed, as the economy starts to fire on all cylinders, it is essential that the Fed keep pouring in new cash to fully accommodate economic recovery. The United States is now poised to defeat deflationary recession with a tax-cut-led policy of reflationary recovery. And the American example should positively influence the moribund economies of Western Europe and Japan.
Who knows, within a few months some reporters may even be heralding a growth-led decline in the budget deficit. Supply-siders will have to hold their tongues in order to avoid crowing, "We told you so."