By Collen Roche of Pragmatic Capitalism
Late last week the CIO of a boutique investment firm emailed me with some superb thoughts on the increasing debt in financial markets. He referred to the current environment as the “financial pyramid”:
“If this financing pyramid is near correct, then prices are simply a reflection of leverage rather than an inflation of money. If there is only speculative non-bank horizontal money, then whatever commodity (non-monetary) inflation exists must be transitory, because it relies on a permanent Ponzi condition (leveraged commodities holdings that depend on prices being higher to satisfy liabilities). So it seems that the central banks distortions of the last several years are creating some imbalances that are unintended and unwanted, which is to increase speculative volatility in things like oil, which goes from $40 to $150 to $50 to $130 over and over. Paper profits change accounts but the real economy is not theoretically affected, except that it is held hostage to this casino game of rapidly changing prices for basic materials and necessities that businesses and consumers use to make decisions. So the economy is in actuality disrupted by the casino, the casino creates no net wealth, and everyone is worse off as this charade continues.”
That’s one of the best summaries of the effects of QE2 I have yet seen. Most interestingly, Ben Bernanke is likely to be right about one thing – the increases in commodity prices are likely to be transitory and the continual fear mongering over high inflation is likely to be wrong.
Full article here: THE FINANCING PYRAMID | PRAGMATIC CAPITALISM.
