by Bill Bonner of dailyreckoning.com
"First, there was the New Woman.
Then, there was the New Economy.
Now there is the New Inflation.
Asset inflation is as different from the regular kind as an illicit affair
is from an ordinary one. It is much more agreeable when it comes in...and
much more painful when it goes away.
And it is not all created by central banks or Treasury Departments.
By now, we understand central bank inflation only too well. It worms its
way down to the consumer economy through the banking system. Eventually,
but not immediately, prices rise. And when prices rise too steeply, voters
begin to howl...businesses get jumpy...investors start to flinch...and the
whole economy goes sour like old milk.
But this 'New Inflation' is different. It is the 'Wave of Liquidity' that
is floating up prices of capital assets...and rich peoples' toys...all
over the planet. Yes, dear reader, the rich have done very well out of all
this new liquid. It has boosted up their wealth. Their stocks, their
bonds, their property...even the works of art that adorn their walls have
floated up.
Where does all this money come from? Ah...that's what is new about it. And
it is why the financial industry is making so much money.
It works like this. You have a house worth $100,000. You take out a
mortgage for $50,000. Then the mortgage is mixed together with other
mortgages, stirred, shaken and sold to a financial house, X. There, it is
used as collateral for a loan of $500,000...which is invested in a
leveraged buy-out of a Company Y...which then issues bonds worth $5
million, which are taken up by hedge fund Z, that borrowed the money to
buy them from the Japanese at a low interest rate, exchanged it for
dollars, and now invests in these junk bonds at twice the yield.
At every step, the financial intermediaries make their commissions, their
spreads, and their fees. At every step, the amount of notional 'money' in
the world multiplies. Your income has not changed...your house is still
the same...business Y makes no more profits. The real economy remains just
as it was. This feverish financial activity...this 'financialization of
the economy' adds nothing...not one jot or tittle...to the real wealth
that is in the world. There are no more factories...no more diamonds...no
more steak sandwiches. All this
money-shuffling produces nothing but more
profits for the money- shufflers and more wealth for the rich people
around the table.
As long as the credit bubble expands...it also expands the values of the
assets held by the rich. Their stocks, bonds...junk bonds...and all other
assets, go up in price. Which means, that they are the beneficiaries of
the New Inflation. When their junk bonds or houses or stocks go up in
value...they have more purchasing power. They can trade financial assets
for other assets. They can use them to buy a time-share in a corporate
jet...or a vacation house at St. Barts. Or, they can simply buy more
'stuff.'
We can be sure that they are not going to drive up the price of toilet
paper or margarine, however. Consumer prices are, broadly speaking,
unaffected. The rich don't use more toilet paper just because they have
more money. Nor do they eat more hamburgers. But insofar as they have more
purchasing power, thanks to this New Inflation, they grow richer, compared
to the rest of the world.
This might not make much difference, eventually, of course. Every dollar
created out of thin air eventually goes back from whence it came. All this
pseudo-wealth - created by the New Inflation - will eventually disappear.
Credit booms are typically followed by credit busts. Junk bonds typically
have their moments of glory, followed by their hours of desperation and
defeat. Things that go up so spectacularly can be expected to go down in a
sensational way too.
But here is where the real problem arises. While financial assets rose in
price, so did the debt burden on the proletariat. The New Inflation meant
new wealth to the rich; to the lumpen...the booboisie...it meant
debt-financing. What the middle and lower classes got out of it was an
opportunity to ruin themselves; which they took up readily.
New Inflation is sure to be followed by New Deflation. We wonder what that
will feel like."



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