Rather than a harbinger of inflationary doom, the $100 rise in the real gold price over the past three years is a welcome sign that monetary deflation has been curbed by the Fed. The central bank finally woke up to the need to start creating plenty of new dollars to finance a return to prosperity and accommodate the most powerful tax cut of the past 20 years.
In ballpark terms, if the constant-dollar gold price rises by another $100 in the next year or two, only then will the inflation outlook shift upward by a couple of percentage points. Economy-slowing interest-rate rises would follow suit by the mid to late years of the decade.
That said, the fact remains that tax-rates on investment, capital formation and work effort have been slashed. This is an inherently pro-growth and counter-inflationary development. Add surprisingly strong productivity gains to this scenario, and we find ourselves in the constructive economic position of producing more goods to absorb any potential monetary excess. As the economy's potential to grow moves up, its potential to inflate moves down.
In short, another long prosperity boom is very likely.
Going forward, the mission for U.S. economic policy should be to stabilize the value of the dollar in terms of gold and the major foreign currencies. This will protect the interests of both the investor and the consumer -- key elements of a winning political coalition for President Bush next year, and essential components of the new prosperity boom.