My impression is that the market's interpretation of inflation risks here,
seen most clearly in the surge in gold prices, is basically correct. As I've
long noted, inflation essentially reflects expansion in unproductive government
spending. “Unproductive” in this sense doesn't refer to the social value of that
spending, but the likelihood that it will add to productive
capacity of the economy that did not previously exist and would not have existed
if the funds were invested otherwise. If disasters were good for the
economy, then we'd see a city rebuilt every year. Unfortunately, disasters cause
economic disruptions, and rebuilding replaces rather than adds to
productive capacity. Sure, some things will be rebuilt better than before, but
those benefits are likely to be overwhelmed by the disruptions, not only in
economic activity, shipping, and so forth, but in the natural resources markets.
It's clear that some of the greatest demand impacts from Katrina will be on
commodities such as lumber, oil and other real goods. In short, my impression is
that the markets are correct and not nearly complete in responding to the
inflationary potential of a government that promises hundreds of billions of
dollars in real goods and services without the means to pay for them.
emphasis in red is mine
Earl