The consequence of the Fed's bailout action in terms of
accelerating inflation should be felt by the end of 2008. The
USD fall will likely accelerate, and so will economic
weakness. The next step will depend on the Fed's policies on
the currency crisis, namely, whether they choose to defend the
dollar or let it go. So far the choice has been to let it go
and defend the weakness of the economy, i.e., not allowing
the financial economy to contract,
the "easy" path. It was immedially felt, as some commodities
experienced severe shortages. Rather than "speculators", I
would attribute the shortages to "too much money chasing
few goods". Naturally, we should see "deflation" in other
areas of less necessary items, thus creating a "low inflation"
number in the geometrically weighted BLS statistics. IF the
stock market continues to rally with UST ongoing
DUMP, we may see more of a housing crisis, for now, as
interest rates go up. The
eventual path, and whether US experiences hyperinflation or
not, will depend on the actions of the Fed and the treasury.
For now it's ongoing acute CURRENCY CRISIS, as the goal
of the administration is to prevent economic weakness at
any cost. This is the cost. Rebuilding manufacturing base
takes time and requires a STABLE currency. In case of acute
instability of the currency, capital flows are shifted toward
speculation, rather than the productive sector of the real
economy. Such shifts eventually lead to hyperinflation, once
the real economy simply shuts down.
Inflation should also be felt in exporting economies such
as Japan, and the consequences are negative for their
manufacturing sector. If BOJ chooses to bump the rates
even 25 bp. and stop loading/unload the dollars, things will
get really interesting. |
