Kudlow’s Deflation

I have great respect for Larry Kudlow and his affinity for free markets, but I am not sure where he is coming from when discussing possible deflation:

There’s housing price deflation: The Case/Shiller home-price index is off 3.5 percent over the past year.

There’s commodity deflation: Gold prices are off nearly 15 percent from their 2006 highs. Stock prices for materials are off nearly 13 percent since July 19, while metal and mining shares are off 16 percent.

There’s the deflation of loan values, both CDOs and CLOs.

And there’s the deflation of the Treasury bill rate from 5 percent to 4 percent.

Larry is largely discussing specific falling prices, not deflation. In other words, he is speaking in anecdotes that do not reflect the overall price level. In fact, by any measure of the overall price level, prices are rising — and rising at a rate above the Federal Reserve’s comfort zone. Thus inflation is still a concern. Meanwhile, Larry has fallen for the old adage, if we ignore the prices that are rising, there is evidence that prices are actually falling.

I think that Larry is more concerned about housing and its effects on the economy than he would like to admit.

Addendum: I better not tell our friend Barry Ritholtz. This is his pet peeve.

One response to “Kudlow’s Deflation

  1. Monetary policy is not my field. I’d agree that signals are conflicting and that Misters Ritholz and Kudlow can each make reasonable cases.

    Where Kudlow has been convincing has been the spread between the discount rate and the 90 day T-bill. The spread was more than 200 basis points before the Fed moved and remains at, what, 75? Kudlow’s suggestion that the market sets interest rates better than a government body is persuasive.

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