"The thing is, excess liquidity should be signaled by accelerated inflation, as goods and services are bid up."
Not necessarily, or, at least, not necessarily for a very long time.
Excess liquidity represents --- by definition --- monetary inflation.
But, one can have excessive monetary inflation (as I'd argue that we do now) for a very long time without the cost of manufactured goods rising... just so long as (and ONLY as long as) you have trading partners who are willing to accept your inflated and un-backed paper currency in exchange for the goods they manufacture and sell to you, (as China and, to a lesser extent, Japan seem willing to do for now).
With RAW materials, the situation is much different as they are imported from many, many different countries (most with free-floating currency regimes) and THERE, the inflation over the past two or three years has been HUGE... with double and triple digit price increases the norm.
All it takes for the 'other shoe' to drop, is for China & Japan to either:
1) Start widening the bands within which their currencies are allowed to trade, or else move 'Big Bang' style almost over-night to free floating currencies...
2) Or to drastically begin cutting back the amount of their trade surpluses that they 'invest' in Treasury bills and bonds (which serves to 'mop up' vast quantities of dollars that are sloshing around in the system... but which loses them Billions annually as an investment choice).
Were either, or both of these things to happen (and most economists believe it to be 'inevitable', the only question being timing), we would see a SIGNIFICANT and SHARP fall in the Dollar and Treasuries --- forcing a huge increase in interest rates to finance our perpetual deficits (and adding tens of billions to the carrying costs of our debts, both national and business and consumer). |
