<<Ludwig von Mises would be aghast. In the past we have emphasized how monetary inflation generally manifests into three forms: consumer goods and services inflation, rising asset prices and trade deficits. Unfortunately, current thinking looks askance at only rising consumer prices, while trumpeting the virtues of the rising asset prices and imports.
So this part is where all the disagreement is??? discuss?>>
David--yes, I think this is where most of us distinguish ourselves from the bullish pop-economists that the media like to quote, i.e, Kudlow/Galvin/Battapaglia (the KGB). Specifically the CPI is trotted out every month as a shining example of why all is well, ignoring the rather glaring and frightening examples of continued record current account deficits (needed to finance ongoing bubble maintainence) and asset inflation (stocks and real estate, perhaps now tankers as well). I like to think of it this way: all 3 forms of monetary inflation are linked, kind of like one big gas bag (think of a baloon squeezed into 3 segments). The gas can be moved between all of them with relative freedom, as long as the total volume of gas (MZM, M3, whatever broad definition of money you choose) continues to expand, the 3 bubbles will as well (though at different rates). In essence, stock and real estate prices, and the foreign deficit serve as reservoirs for FUTURE CPI inflation. The media is choosing to focus on the consumer/service price inflation as the only meaningful gauge of inflation, which is wrong. That frequently happens during asset bubbles, though, and is one of the prime blind spots that allows continuing propagation of the bubble. Kindleberger also makes frequent reference to this in Manias, Panics and Crashes. Bubble resolution occurs when 1) the bubble becomes exposed when money flows from the other 2 bubbles into the "CPI" bubble (usually inducing a monetary contraction response on the part of the central bank), or 2) there is a desire to convert "asset bubble" money into more liquid forms (cash) causing a panic or crash directly. The latter can be stimulated by foreign events, act of nature, war, recognition of commodity inflation or recognition of previously unrecognized weakness in a nation's financial structure. During the height of the bubble, the precipitating force is usually unforseen, or at least underappreciated (think of oil/energy prices as viewed, say, 6 months ago...or think of portfolio insurance in 1987, the Gulf War in 1990, or the Asian currency crisis in 1997).
von Mises is perhaps the most articulate economist on the subject, but there are many, many others. |
