THE EDITORIAL PAGE Complacency an ally of inflation

Too much money chasing too few goods. It’s the classic Keynesian definition of an economic phenomenon which, just seven short years ago, was on the lips of every economist and politician — inflation. At that time, inflation and the subsequent war which was declared by the Western economies on it, plunged the industrialized West into one of the worst recessions ever. In Canada, the Trudeau government’s efforts to hammer the demon of inflation into submission spawned crippling interest rates of more 20%. The tight fisted monetary policy of the day worked, pushing inflation back to its current manageable level of less than 5%.

However the human toll was enormous, as the number of unemployed swelled to record levels; a result of stagnant industrial investment and growth. The tse composite in August, 1981, lolled in the doldrums around 1,300 pts. During these bleak economic times, gold reached its highest level ever in January, 1981 — $850 (US) per oz.

Inflation was never killed, only controlled. However, an alarming degree of complacency appears to have settled in — a complacency which assures us that all is well and will stay that way. But few can ignore the ever increasing warning signs that inflation, which ravaged our economy just a few years ago, is showing renewed vigor.

Slow economic growth in the U.S. is expected to force the Federal Reserve to relax monetary policy, according to Martin Murenbeeld who publishes The Gold Monitor. This should result in stronger U.S. industrial growth — and higher prices. According to the International Monetary Fund, the growth of the money supply in the industrialized nations continues at a rapid pace. In the U.S., first quarter results show a rate of 16.5%, well above that experienced in 1986.

Inflation, which is never too far from the minds of gold bugs, is also being closely watched by officials at the Federal Reserve. Incoming chairman Alan Greenspan has vowed to fight any threat of renewed inflation, as has Bank of Canada governor John Crow. However, the conservative Republican economist is undoubtedly going to feel pressure from the Reagan administration to make economic growth the Fed’s number one priority, not inflation. If this scenario materializes, and many believe it will, then a swelling U.S. money supply combined with low interest rates will take their effect on inflation.

This time, as in 1980, too much money chasing too few goods will describe a formula not only for inflation but for higher — much higher — gold prices as well.