Is this President Bush's economic boom? (page 1 of 3)

We have a righteous, intolerant and belligerent third rate intellectual who lives in a big white house, runs the world's largest economic and military power, and who has surrounded himself by some very shady characters who are also because of their complete military incompetence, and lack of any knowledge of history and understanding of geopolitical conditions very dangerous.

At the same time, we also have the pleasure to regularly watch two fast-talking and squeaky clowns in the CNBC circus who, for the last few years, have given their upbeat views on any economic, financial and political issues.

The "know it all" duo's advice has not been particularly rewarding for investors, and had you invested your money according to their "never in doubt" bullish mantra, your assets would be worth today at least 60% less than in 2000 (in terms of Euro or in a hard currency such as gold, they would be down in value by another 25%).

But since poor advice is not only endemic to the two relentlessly irritating CNBC financial commentators but is almost a prerequisite for success in the financial service industry, we shall not hold it against them.

Still we have a question relating to a recent statement by Mr. Kudlow, which somewhat surprised us, since Mr. Kudlow is not exactly born yesterday although some of his views could lead one to believe so. In a recent article he explained why "this Bush Boom is a lot like the Reagan Boom 20 Years Ago".

Now, I have some reservations about this comparison for the following reasons. If you look at interest rates over the last 40 years or so, you will see that when, in 1980, Mr. Reagan became President of the US, rates were near their highs and since Mr. Volcker (then the Fed chairman) pursued at the time very tight monetary policies he managed to bring down the rate of inflation, and subsequently also interest rates, which then fell for the next 22 years.

Needless to say that whereas interest rates were sky high in 1980 and significantly above the rate of growth of nominal GDP, today the Fed Fund rate is significantly below the rate of nominal GDP, which suggests that short term interest rates can only rise if nominal GDP continues to expand, as Mr. Kudlow suggests with his "Bush Boom" fantasy.

The tight monetary policies of Mr. Volcker in the late 1970s and early 1980s were evident from the fact that short-term interest rates were pushed above nominal GDP growth and above long term interest rates.

This very tight monetary policy implemented by Paul Volcker is usually credited for having brought down the rate of inflation after 1980. However, it is my view that the rate of inflation would have come down regardless of monetary policies because strong price increases for all commodities between 1965 and 1980 had led to additional supplies, which after 1980 began to flood the market and depress prices. This was particularly true for oil, which had risen in price from $1.70 per barrel in 1970 to close to $50 per barrel in 1980.

In addition, conservation efforts all over the world had curtailed demand. Finally, the fourth Kondratieff price wave, which had turned up in the 1940s was due to reach its plateau between 1975 and 1985, and then to turn down, since each phase of the long wave lasts between 22 and 30 years (according to Nikolai Kondratieff the ideal length of the long wave cycle, which consists of a rising and falling wave is between 45 and 60 years).

Therefore, the combination of rising supplies, energy conservation, and diminishing purchasing power on the side of households (because of inflation exceeding nominal income gains) would have in the early 1980s - regardless of monetary policies - brought down the rate of inflation sooner or later.