The WSJ is beating the war drums for higher interest rates. I think they’re right:

The dollar price of gold is also reaching heights not seen since 1980, closing near $800 an ounce yesterday. Gold is not some magic talisman, but it has served throughout history as a reasonable proxy for other prices. The nearby chart shows the trend since 1971, and if nothing else the recent gold rally is a market commentary on the Fed’s priorities. The speculators think the risk is all on the inflation side. Meanwhile, the dollar — “the Bernanke” — also hit a record low against the euro yesterday.[...]

In the worst case, the world could lose faith in U.S. monetary management and there would be a run on the dollar. Then the Fed would have no choice but to raise rates much higher and faster to restore its credibility, and the recession that followed would be far worse. That’s what happened as recently as the 1970s, the last time gold and oil reached these heights and the dollar was this weak. In that era, as in this one, the excuse for easier money was always to save the U.S. economy from recession. In that era, too, the rise in oil prices, gold and other commodities was blamed on everything except monetary policy — OPEC, or rising global demand or something.

We rehearse all this not to say we are back at the 1970s but as a warning that we can get there faster than the sages at the Fed imagine. Yesterday’s report that third-quarter economic growth clocked in at 3.9%, following 3.8% in the second, already shows that most Wall Street forecasters were wrong earlier this year. The Fed is worried about growth after the summer credit implosion, to be sure. But if the economy defies the forecasters again, the Fed could be raising rates faster than it now expects. The dollar’s credibility as the world’s reserve currency may depend on it.

I blame Bush. I think Greenspan and the Bushes never got along, and GWB put in a loyalist (Bernanke) he could count on to not raise interest rates during his term. The next President has an economic mess awaiting them. I suspect the Fed will raise rates as soon as the new President takes office. The only question after that is what to do about entitlements…

Read the whole thing here.

This entry was posted on Thursday, November 1st, 2007 at 10:05 am and is filed under News & Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.