The genius of the Bush tax plan was that it lowered the burden on capital investment -- the seed corn for business expansion and job creation. The genius of the Greenspan Fed up to now has been its removal of post-9/11 excess money without throwing the economy into stagnation or recession. The combination of these two policy levers -- lower taxes for growth and stable money for price stability -- suggests that the current cycle of non-inflationary prosperity can last for many years.
Investors reacted joyously to Dick Fisher?s statement. The stock market rose by over 100 points and the bellwether 10-year Treasury bond rate dropped to 3.91 percent. Stocks are signaling future growth while bonds are anticipating low inflation.
Fisher may be only speaking for himself, but there?s more to it than that. While numerous mainstream economists are trying to belittle his remarks by suggesting he?s just a rookie in the big leagues, they have nothing to stand on but their mistaken forecasts that strong growth will create higher inflation and a big upturn in long-term interest rates. They?ve been dead wrong for years.
Growth never causes higher inflation, nor do people who work and prosper. Inflation is a monetary problem, and after a brief period of excess money creation, the Fed removed inflationary money. The lower Bush tax rates did their part by increasing the availability of goods and investments to absorb money supply and provide a counter to potentially inflationary developments.
It?s likely that Dick Fisher, who?s no gun-slinging hip-shooter, is reflecting a sub rosa buzz inside the Federal Reserve System. The buzz is that the Fed has succeeded in holding down inflation and that the tightening cycle is coming to an end.
It?s too early to expect a formal policy comment to this effect. But it?s clear there?s a considered view within the central bank that economic and inflationary conditions are far better than the predictably dour and declinist mainstream media would have us believe.