All other things being unchanged, growth in money supply must lead to higher prices of things. For those higher prices to be sustained they must be supported by commensurately higher wages for the people who buy those things. If wages don’t keep up with prices, people can’t afford to buy those things, and prices must then fall to meet the level at which demand for the things can be attracted. Economics can be pretty darn simple, no?
The only thing uncertain is the timing or extent of the price increases or the potential for subsequent price declines. Many factors are in play to influence these things including the globalized economy and the relative health of other nations, the degree of complaining by creditor countries whose U.S. Treasuries get devalued with inflation, the actions of other central bankers, the availability and pricing of credit, the calculus as to how many people will be left behind by inflation (retirees, near retirees, and the unemployed) and what tolerance a society has for that, as well as taxation and regulatory policies.Economics can be so darn complex, no?
I’ve noticed that people in the investment world tend to get so inundated with reports and statistics, much of which is presented in a super complex manner and even with Greek letters, that their glasses fog and eyes glaze, and the obvious is sometimes overlooked.
Prices of financial assets are very high today, and especially so when taking into consideration the tepid global economic performance and its prospects going forward. Yields available to investors are thus very low, which could be indicative that the world is very stable andinvestment risk is commensurately low, or that there is an imbalance in the amount of investable funds seeking a return and the amount of investments opportunities for those funds. If the former, which I think that only a very few would argue is the case today, things are very nice indeed. If the latter is the case, then trouble lies ahead as imbalances have a way of resolving themselves and mostly in rather violent, unpredictable, and abrupt manners.
The Fed, along with the world’s other major central banks, have been desperately trying to manufacture inflation, apparently hoping that it will lead to real economic vibrancy – including job creation and wage growth. I must admit to be a skeptic of this theory, and doubt that any form of central planning can actually produce the desired outcome. In economic parlance, there are two terms used to define growth: “Real” and “Nominal.” These terms are meant to distinguish between what is real and what is illusory. Wage growth that occurs because of improved economic vibrancy, mostly due to increased productivity, leads workers to afford an improved lifestyle. In other words, their wage increases aren’t eaten up by price increases of the things they buy everyday. This is “Real”growth. In these happy times people can afford to buymore and better things, and even have some of their wages left over for savings. Alternatively, there is inflation-induced growth, or what economists refer to as “Nominal”(read: “illusory”) growth. In this case, wage increases are absorbed entirely by increases in the prices of the things one buys regularly such that the opportunity for either buying better or more things, or saving excess earnings, does not exist. It seems pretty clear to me that our economic leaders, shooting for higher inflation, are setting very modest goals for our nation. It also seems that the prices of financial assets are disconnected from that reality.