an extremely relevant discussion between two 'experts' on one of my favorite investor boards ...
J : "It is unusually low interest rates that give rise to monetary inflation. The rates can stay low while the inflation builds. "
M: "So are you saying there is a lag -- but ultimately [that] low interest rates will lead to lending excesses that in turn will lead to inflation? "
J: "The US Fed is inflating, but the inflation is being 'exported.' And in exchange we're importing 'deflationary pressures'. Vastly oversimplifying, US originated credit is spent [by US consumers] on imports, generating US$ export earnings for foreign producers. Those exporters redeem those US$ for BRIC [acronym for Brazil + Russia + India + China] currencies they need. Unless those BRIC Central Banks sell bonds in equal measure (sterilization), that TRANSMITS our inflation to the BRICS. Our credit bubble = their inflation. Those Central Banks, in turn, take those US$ they've acquired and deposit them in NY and buy Treasuries. Keeping upward pressure on prices and downward pressure on rates. "
M: "the trade deficit is essentially "inflated money" these are dollars that are not backed by real production - but since countries like China and Japan are willing to recycle those [trade surplus] dollars into [US] treasuries and continue to sell us cheap products that we will never pay for (in terms of returning real products in exchange) we are not feeling the inflationary pressures of all those dollars being printed to buy junk from the junk providers....its like a perpetual motion machine until it jams and when it jams there will be 7 or 8 trillion worth of IOUs that will become hot potatoes...this is the story of how fiat currencies end up failing. "
J: "We are inflating now. Lower than market balancing interest rates promote higher than market balancing credit growth creating monetary inflation. Its not showing as much in prices because as some think we are importing 'deflation.' Its a myth created by a lowering of living standards overall and currency and debt manipulation in the extreme. China devalued their currency in 1995. That's what started this 'Asian miracle.'
In fact, the inflation is showing up loud and clear in asset bubbles here and there and a price creep that is subtly masked but there. The government is doing a good job of masking the symptoms of the inflation, and the stories they spin around it have taken in many who can respond with catch phrases and slogans they've heard, but the outcome will inevitably be the same.
The only lag is ultimate reckoning. M3 is growing at about 10+% now in an economy with a GDP growing at about 2% at best. Japan and China can hold our markers at artificially low rates for a time, but eventually the market will balance, and that debt will be dealt with.
We have a Frankenstein economy. The koolaid is being passed around, its in the water."
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