Wednesday, October 19, 2011

Krugman Sees the Global Inflation that is Coming

Paul Krugman writes today on the EuroZone crisis:
There was some excitement yesterday over reports that the European were going to establish a 2 trillion euro rescue fund. Was this the “big bazooka” needed to put an end to the debt crisis? No....

First, when you try to figure out how the thing might work, it turns out to have much less lending capacity than early reports suggested.

Second, who’s backing this thing? Even France is looking a bit shaky, so it’s unclear how it’s supposed to work if government Treasuries are the guarantors. What you really need is open-ended funding from the European Central Bank, and that’s not yet on the table....
Krugman is correct here, but I don't know if he is aware how correct he is. "Open-ended funding from the European Central Bank" means one thing, big time money printing from the ECB. The former-Goldman partner Mario Draghi takes the helm of the ECB on November 1. It is hard to imagine that he will run as tight a monetary policy as out-going ECB president Jean-Claude Trichet.

The money that will be needed to keep the ECB afloat will be huge. This likely means that the ECB will join Ben Bernanke and the Fed in one near-global money printing orgy. The price-inflation will be spectacular. Hug your gold coind tonight.

4 comments:

  1. Thanks for your blog.

    I do have to disagree with your perspective on impending price inflation.

    Price inflation if it does come will from manufactuers and retailers creating it to stay in business to offset falling demand.In this sense demand destruction creates inflation.

    The Milton Friedman Free To Choose floating currency regime died in September as the US Dollar, $USD, rose and the world’s currencies, DBV, and emerging market currencies, CEW, and commodity currencies, CCX, turned lower with copper, JJC, and the Chinese Financials, CHIX. The Copper Bubble finally burst as in China they relied on ponzi credit, that is ponzi financing.

    The world's currencies all turned lower on exhaustion of Quantitative Easing, European Sovereign Debt angst, and on competitive currency devaluation, largely from the bursting of Copper Bubble.

    With falling currencies, commodity prices will turn lower and the current nascient price inflation and PPI price inflation abate.

    There will be little demand for the EFSF monetary authority bonds. Investors recognize that this is not a sovereign authority, that it does not have sovereign debt authority, and will not purchase its bonds. Investors and the rating agencies alike recognize that creating more debt via this CDO process is actually monetization of debt, and will call interest rates higher and ratings lower. M2 in the US will be turning down, now that the flight to safety in US Treasuries is over. There will not be any Eurozone flood of money generating price inflation. Thus price inflation in the US is simply a view from the rear view mirror, unless like in Argentina, and Brazil, there is price inflation coming from manufactuers and retailers creating it to stay in business to offset falling demand. In this sense demand destruction creates inflation.

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  2. "Price inflation if it does come will from manufactuers and retailers creating it to stay in business to offset falling demand.In this sense demand destruction creates inflation."

    Market competition won't allow for it for long. Besides, assume the money supply is fixed; increasing costs on a given set of goods will force cuts in spending somewhere along the line. This means there won't be a general rise in the level of prices, i.e. price inflation. Without an increase in the money supply, there is no such thing. So it is still the ultimate cause.

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  3. @anon 12:33pm

    "With falling currencies, commodity prices will turn lower and the current nascient price inflation and PPI price inflation abate."

    The exact opposite will happen, in nominal terms. With a greater supply of dollars - there are more dollars to bid up asset prices

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  4. I don't know why anyone works for a living when everything (their bogus money) you work for is stolen from you in taxes and inflation. The Greeks are not the fools.

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