by ilene - October 8th, 2010 12:56 pm
Courtesy of Data Diary
There is something of a speaking-in-tongues fervour about the place recently. Bring back big hair, smelly armpits and the Doobie Brothers I say. We all need a little peace, love and skyrocketing oil prices. (If you want a 1973 vintage backtrack to this post – Jesus is Just Alright here.)
To distil a few themes from the cacophony:
1) When money is cheap, speculation is abundant. And it doesn’t get any cheaper than when the government is giving it away. The end is nigh when the suspension of disbelief can’t be sustained. That is when investors will want out – it’s every Ponzi scheme’s dilemma. We aren’t there yet.
2) Inflation is the destination, we just don’t know whether we will get there. The Fed will stop at nothing in their pursuit of inflation, but they can’t control where liquidity flows. They want wage inflation. They think by spurring asset price inflation it will lead to rising inflation expectations and then onto real incomes. The problem is that consumables may just explode in the meantime – what good is a few dollars saved on mortgage repayments when your cost of living has gone through the roof.
3) Corporate margin expansion has reached its peak. The majority of margin expansion since 2000 has come via the wage bill. Absent productivity gains, this is a finite trend. The Fed says they want wages to increase relative to everything. Labour winning over capital is not multiple friendly.
4) Last chance to buy cheap goods from China. It’s revalue the Yuan or cop tariffs. Either which way, the days of ridiculously cheap goods from China are near an end.
5) Commodities supercycle is likely to go parabolic. The flight from paper money to real assets has been gathering steam. With the financialisation of commodity derivatives, this trend can run to unprecedented extremes (for those not familiar with the term, it means ‘hasn’t happened before’). Should China ease credit again – which is a fair bet given the impending hit they will take on exports – capital investment will be sucking at the physical market at the same time. That sounds like a recipe for a party.
Data Diary.
Tags: asset inflation, CHINA, commodities supercycle, cost of living, income, inflation, Ponzi scheme, the Federal Reserve, Wage Inflation
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by ilene - June 10th, 2009 2:47 pm
Courtesy of Henry Blodget at ClusterStock

Arthur Laffer joins the chorus of economists predicting that the Fed’s massive stimulus will lead to hyper-inflation.
Laffer focuses on the huge expansion of the monetary base and predicts that faced with two bad choices--inflation or crippling the economy--Bernanke will choose inflation.
We agree. The double-digit inflation of the 1970s didn’t happen because Arthur Burns and the politicians were stupid. It happened because they didn’t want to kill the economy by raising rates. If it comes to that, in our opinion, Bernanke will likely err on the side of inflation.
Laffer doesn’t address the counter-argument, made by Paul Krugman, which is that you can’t have hyper-inflation without wage increases, and we’re not seeing wage increases (yet.)
Here’s Laffer:
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!
Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money…
What’s important for the overall economy… is how fast these loans are made and how rapidly the quantity of money increases. For our purposes, money is the sum total of all currency in circulation, bank demand deposits, other checkable deposits, and travelers checks (economists call this M1). When reserve constraints on banks are removed, it does take the banks time to make new loans. But given sufficient time, they will make enough new loans until they are once again reserve constrained…
At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half
…

Tags: Economy, hyperinflation, inflation, Money, Wage Inflation
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