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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: ild who wrote (48086)12/23/2005 3:35:32 PM
From: Kailash  Read Replies (1) of 110194
 
Power law growth of inflation

Sornette et al (2005) argue that hyperinflation is caused by a feedback loop of inflationary expectation that makes prices rise super-exponentially until they reach a singularity.

arxiv.org

"Hyperinflation regimes are of special interest as they emphasize in an almost pure way the mpact of collective behavior of people interacting through their expectations."

They apply the model to Bolivia, Peru, Israel, Brazil, Nicarague, Hungary, and Germany (going backwards in time) and conclude "positive nonlinear feedback processes are important mechanisms for understanding financial processes".

Sornette, who is a physicist by profession, has also written the book *Why stockmarkets crash* (Princeton, 2003).

Applied to our discussion here, the question is whether the prices of real goods (Sachwerte) is undergoing a rise in anticipation of higher prices and devalued currencies, a feedback mechanism that in itself causes prices to rise. If that feedback -- based on expectations -- isn't dampened, we should get power-law type growth leading to a singular crash.

Gold is a likely candidate for power-law growth and subsequent crash. The price of oil will in the end be limited by its utility, which is high but not infinite, while the value of gold is limited only by the imagination.

Kailash
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