comments about inflation consequences from prominent banker
he will remain unnamed, but hails from Europe
his conclusion points to Liquidity Trap, ala Japan
with rising interest rates
his reasons are simple
speculated assets would have to be sold, but they cannot
money is locked into the financial world, which is disconnected to the real economy
real wages and income growth have collapsed
the writer seems to straddle in both yours and Russell's camp
he paints a picture of eventual bond market illiquidity
"A savage debt deflation is the inevitable outcome. But this kind of deflation does not lower interest rates. It boosts them. Basically, the Fed has lost control."
/ jim
Observing permanent, unbridled money and credit inflation in the United States, the great question in many people’s mind is why it creates no inflation in the economy. Well, it did cause rampant inflation, but not in the national product or the real economy. It occurred in the two areas into which the consumer has poured his borrowed money: soaring imports and soaring asset markets.
LOCKED-IN LIQUIDITY
This immediately raises the next great question that is repeatedly posed to us: Couldn’t all this excess liquidity in the financial markets one day flood into the real economy, boosting inflation in consumer and producer prices?
Our answer is a categorical no. First of all, the excess liquidity went into fixed assets, having boosted their prices. But to move money out of these assets and into the real economy now would require the sale of such assets against cash. Undertaken at a major scale, however, this would merely depress asset values because invested money is in the aggregate definitely locked in.
To flee into “real goods,” the investor has to find other people who are ready to take his asset against their cash, and that means that a net money inflow out of the financial markets and into the economy cannot take place. Therefore, when the stock market crashed in 2001–02, no money exited. Only prices changed. No money moves. Markets are liquid only as long as buyers predominate. They become illiquid when sellers predominate. Liquid markets can turn illiquid overnight, without any contraction in the money supply.
We come to the final and most important questions: sustainability and long-term effects of this extremely unbalanced economic and financial developement. Trying to answer these two questions, we must look at three items: first, asset creation; second, income creation; and third, debt creation.
The key point to see here is that income growth from wages and salaries has literally collapsed, even though economic growth has sharply accelerated. Another anomaly is the continuous, unusually steep rise in indebtedness, mainly on behalf of consumers and the government.
Over the year to the third quarter of 2003, the value of houses, stocks and mutual fund shares owned by private households increased by around $2.5 trillion. Debts increased by around $1 trillion. Total personal income grew $298.5 billion and wage and salary disbursements by $123.2 billion.
Grossly distorted economic growth at the expense of saving and investment is one dangerous legacy of America’s asset inflation. The exponential rise in the consumer’s indebtedness in relation to his badly lagging income growth is the other. A savage debt deflation is the inevitable outcome. But this kind of deflation does not lower interest rates. It boosts them. Basically, the Fed has lost control.
CONCLUSIONS:
U.S. economic growth is no longer based on saving and investment. Its essence is that credit excess provides soaring collateral for still more credit excess creating still more asset inflation for still more borrowing and spending excess. It seems like a perpetual motion machine that just goes on cranking out wealth and spending. It is important to see that the true name of this game is bubble-driven growth, and all bubbles end by bursting. America is the next Japan. |
