Been thinking about 'FLATION and money supply again. A little new way of thinking for me perhaps.
It seems that money supply creation through time has rippled through different asset classes. It seems that the most immediate impact of artificial pressure on interest rates by the Fed is to inflate bonds. However, there is fairly quick transmission to other asset classes. Stocks follow on short order, and real estate usually tags along a little later. However, once inflation has marked up bonds, stocks, and real estate, it begins to stoke demand and turns up in commodities.
Now why is it that price increases are "good" if it involves bonds, stocks, or housing, but "bad" if it involves commodities? Pretty simple. In our economic system, anything that causes corporations to turn the crank more times in a given year leads to higher employment and profitability. Rising bonds, stocks, and real estate create purchasing power that boost aggregate demand, if only temporarily. However, the impact of monetary policy on commodities occurs with a lag, and rising prices there sap corporate profitability because they are inputs. This declining profitability becomes sand in the gears and brakes the economic engine.
Thus the Fed is asymmetrically inclined toward increasing prices on assets, and against rising prices of any inputs: commodities or labor.
The big question for me now is whether or not the Fed still perceives rising commodities as *its* problem any more. With our so-called miracle service economy, the main input for US corporations has shifted almost wholly to the price of labor. It could be that the only thing the Fed concerns itself with any more is the price of labor. Commodities pricing is a problem only for the manufacturing economies of the world.
Under this scenario, we could be set up for an unprecedented continuation of this commodities pricing cycle until the producers can bring more supply online. The only way that the Fed then cares a jot about commodities is via the still further lagged impact on labor pricing. While there is certainly global pressure on labor pricing, eventually higher gas prices will lead to wage demands in the U.S.
What do you think? If it were true, we should be rethinking the potential for commodities this cycle. It may be that "it's different this time."
BC |
