tag:blogger.com,1999:blog-6798074091942701235.post6257898371939266211..comments2024-03-29T01:35:09.550-04:00Comments on Can Turtles Fly?: Two Specters That Will Haunt Investors In the FutureSivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-6798074091942701235.post-42896321583965356002008-03-05T22:30:00.000-05:002008-03-05T22:30:00.000-05:00Thanks for the comments Applesaucer...I'm not an e...Thanks for the comments Applesaucer...<BR/><BR/>I'm not an economist but I don't subscribe to the Austrian Economist views (but you guys have some good company in Jim Grant, Marc Faber, etc). No doubt that money supply causes inflation but here are two issues:<BR/><BR/>(i) I haven't seen any credible views saying what is (or isn't) too great of an increase in money supply. My impression is that many Austrian Economists have been predicting the collapse of the dollar for many decades (since US money supply has been growing for a long time). Nothing happened except at the start of this decade. The problem is that no one knows what is "too much". My impression is that modern economic theory calls for money supply to be printed close to the GDP rate but this hasn't necessarily led to any notion of inflation.<BR/><BR/><BR/>(ii) Money can flow almost anywhere and into any asset. So if USA prints money, there is nothing to stop inflation from being caused in China. Japan, for instance, has been printing money for an eternity and there has been low inflation (clearly the money was flowing out). Investors derive little benefit from looking at money supply. Just like how the FedRes stopped looking at M3 because it provides little information, investors don't gain much insight from money supply either.<BR/><BR/><BR/>The thinking I am more influenced by is what the research outfit GaveKal follows. They rely on the Fisher equation. The key insight from them is that the velocity of the money is important. Money supply can expand but if velocity declines, you are not going to get inflation.<BR/><BR/>For example, <A HREF="http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply2.svg" REL="nofollow">if you look at this chart</A> of US money supply, it actually rose in the early 80's. I will admit that the rate of increase likely declined from the 70's, but it was still rising quite a bit. Yet inflation was declining in the 80's. <BR/><BR/><BR/>THE SEVENTIES<BR/><BR/>In my opinion, most of the inflation problem in the 70's was not just due to money supply. Yes that always plays a role but the main things that caused the inflation in the 70's were:<BR/><BR/>* goverment intervention eg. tariffs, oil embargoes, taxes, price fixing, rent controls, etc<BR/>* other intervention (eg. high wage increases due to unions--not a bad thing in and of itself but when too high, it causes inflation)<BR/><BR/>Just like how <A HREF="http://www.businessweek.com/ap/financialnews/D8V710G81.htm" REL="nofollow"> China is right now </A> trying to combat inflation through price controls, many governments did that with oil in the 70's. Needless to say, inflation roared.<BR/><BR/><BR/>So, in the absence of government intervention, I just don't see inflation. I know the gold market is saying something else; and so is the rest of the commodity complex. But the deflationary forces (from collapsing asset prices and wealth destruction) are just too strong. The bond market is basically pointing towards deflation. We'll see what actually materializes...Sivaram Vhttps://www.blogger.com/profile/06361276466660862882noreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-5938358596215309322008-03-05T10:12:00.000-05:002008-03-05T10:12:00.000-05:00I enjoy your blog very much, but, with all due res...I enjoy your blog very much, but, with all due respect, I believe that your understanding of "inflation" is flawed. For what it's worth, I think this is nearly-universally the case with market commentators.<BR/><BR/>For an alternative view of inflation properly defined and the consequences of applying a proper definition see:<BR/><BR/>http://www.mises.org/story/908<BR/><BR/>Remember: the late '60s-to-early '80s time period was a terrible time for the US, economically, yet inflation roared. Why?<BR/><BR/>Some say it was soaring commodity prices. I would agree, except that I would say soaring commodity prices were in large part a symptom of Central Bank money supply expansion. Some saw what was happening in the mid-to-late '60s, the French, gold speculators, etc., yet the bond marklet remained complacent.<BR/><BR/>In fact, mainstream economic thought held it as axiomatic that inflation and uemployment were inversely correlated. They were wrong.<BR/><BR/>I'll venture a guess right here that Central Bank money printing in response to financial instituion duress will cause an inflationary problem and ultimate bond implosion that will knock your socks off. Could a recession slow this process down a bit? Sure. Can I give you the exact timing on how all this will play out? Of course not.<BR/><BR/>Best,<BR/><BR/>ApplesaucerAnonymousnoreply@blogger.com