Subsidies, from Laurel Kenner

February 6, 2014 |

 Hypothesis: inflation is rampant but hidden by federal subsidies. Prove me wrong or prove me right. If I am right I will go into politics.

Jim Sogi writes:

This seems to be what Gross at Pimco is saying as well. Credit growth fuels asset price. Credit deflation may result in asset deflation. Seems to be what is affecting stocks.

The alternative theory is to follow the Fed's explicit explanation that the Fed is preventing deflation, and that removal of the stimulus will allow prices to deflate. This as they say is the greater risk.

Ed Stewart writes:

That makes sense to me. Credit growth or fed asset purchases have created asset price inflation relative to the rest of the economy, which is known as "the rich getting richer".

Deflation of assets is harmful as it impacts the money supply that leverages off of asset prices via credit. Kind of a different dynamic than what most people think of when discussing inflation based in consumer prices. One thing Mises said that I like is that money creation is never neutral across the price structure. It enters in specific ways and impacts specific prices relative to others. I used to think someone must understand how these things work, I now wonder if it is that things change enough such that understanding is not possible.

Gary Rogan writes:

Presumably asset inflation is related not just to the growth of the money supply (a large portion of which sits as excess reserves right back at it's point of origination and isn't contributing to anything other than bank earnings) but also to the intent of the Fed. Otherwise why would relatively tame tapering result in some deflation even while a huge amount of money is still being printed?


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