To: ild who wrote (73992 ) 11/12/2006 10:03:14 AM From: bond_bubble Read Replies (1) | Respond to In Qualitative Theory of Credit (as per Friedmanites), Credit changes does not cause inflation/deflation. Bernanke believes this theory and for him inflation can NOT be caused by credit expansion (but for some reason he believes, credit deflation can cause price deflation). These school of thinkers (Friedmanites) have to be woken up from the fact that credit expansion does cause inflation. When they see the inflation (caused by conversion of credit into physical goods like food instead of mere boom phase claims to capital titles like stocks and bonds) - Fed will raise interest rates and that is when credit deflation will happen. The hope would be that a)the rise in interest rates does slow down US imports/economy and b) this causes demand pull back from Chinese exporters. Hence, there wont be additional demand increase for food, oil from Chinese!! I believe the current inflation is due to demand-pull rather than cost-push. As the marginal demand increases, the price is set by the marginal producer that produces goods to meet the increased demand. So, even if all low cost producers produce goods at full capacity and at low price, they will charge the same price as the marginal producer!!
