Global Inflation 'Disaster' Coming, Economist Xie Warns

International Business Times ^ | March 23, 2012 8:34 AM EDT | Hao Li

[RC one]

The Federal Reserve didn't see the U.S. subprime-mortgage crisis coming. The European Central Bank was clueless about the euro zone's debt crisis before it hit.

There is little reason, then, to believe these regulators will see the coming global "inflation disaster," independent economist Andy Xie warns in a recent commentary.

Xie based his prediction on the "causal relationship between money and inflation."

"Short-term factors may temporarily slow the process ... [but] there has been no exception to rapid monetary growth leading to inflation," he writes.

In the years since the 2008 global financial crisis, the United States and Europe have maintained very loose monetary policy, and Japan has recently expanded its stimulus, James Bullard, president of the Federal Reserve Bank of St. Louis, told Dow Jones Newswires in a recent interview.

The Fed's balance, for example, has more than tripled since September 2008.

So far, however, inflation remains muted among developed economies. The U.S. Consumer Price Index, for example, rose 0.4 percent in February from the previous month. Pointing to this fact, policymakers from developed countries assert that their domestic inflation and inflation expectations are subdued.

Xie, however, thinks these officials misunderstand the impact of globalization, which has indeed kept inflation in check, temporarily, in the developed world. He believes inflation ultimately will take hold in these countries, and once that happens policymakers everywhere will find it hard to reverse.

Xie, who studied at the Massachusetts Institute of Technology, has a track record of calling financial disasters. He predicted the Japanese asset bubble of the 1980s, the 1997 Asian financial crisis, the deflation of the dot-com bubble and the U.S. subprime mortgage crisis. snip

He claims he has never "called something a bubble that turned out not to be a bubble."

[RegulatorCountry]

There are only two logical reasons that I can see, for those in the private sector to invest in TIPS with negative interest rates.

One would be a bet that the interest cost would be less than the increased value of the dollars held over time.

The other would be extreme distrust of the banking system in the face of a deflationary collapse and all that that entails as far as bad debt due to loss of collateral value, while maintaining faith in the US government.

I don't see it as logical. If it's that bad, treasuries aren't going to be any more of a safe haven, imho.

But, rates are what they are. They too have been distorted for years. Not particularly reflective of any given set of circumstances associated with reality, in other words.

Cheap rates as economic stimulus have been the mode for a number of years

[grey_whiskers]

There's a MUCH easier way to describe this.

Prices on necessities (inelastic demand) skyrocket.

Prices on luxuries (elastic demand) plummet.

Falling...standard...of...living.

Which is intuitive when you realize most of the stuff people have been buying, has been on credit; that the credit is vastly overextended; and that even the "retrenchments" to what is thought of as "prudent" is still vastly overpriced by historical norms (e.g. 30-year vs. 7-year mortgage).

Both the simultaneous lowering of prices AND velocity is not enough to make up for the purchasing power lost by destruction of debt; but this tidal wave is running into (and in some politicians' minds is the justification for) massive printing and devaluation fo the currency.

Only one outcome.

Weimar / Zimbabwe / War.

Only this time, the oceans aren't enough of a buffer to keep the continental U.S. safe; we don't have the currency reserves to fund a war; our national will has been destroyed by "multiculturalism" and "blame the West'; and our "arsenal of democracy" is now the 'arsenal of Maoism': and even our military secrets have been sold.

And the demographics aren't in our favor either, while our young women in prime breeding age have opted to demand government go further into debt to suppress their fertility until their natural fertility diminishes; at which point they will demand even more debt to finance unnatural treatments to their body to attempt to give them a perfect, designer child; those unborn children who aren't selected doomed to be destroyed even before implantation in the womb.

Analogies to Isaiah 3:16 and Isaiah 5:14...

NO cheers, unfortunately.

[blam]

"If inflation is being anticipated, what fool would lock themselves in for ten years, essentially paying a fee for return of capital?"

Okay...

If TIPS adjusts for the rate of inflation, after 10 years, wouldn't you receive back the dollar amount of the original investment PLUS an additional amount that adjusts for the inflation experienced for that period.

So, essentially, these folks are looking for inflation and are content to just receive money of the same value back after 10 years. They're not making or losing any money.(?)

[RegulatorCountry]

In theory, that’s how they’re supposed to function.

Are you drawing SS yet, blam? My mother is. The games being played there as far as COLA, let alone the gamed CPI leave me less than optimistic that TIPS will be any different.

[arthurus]

The price level is rising faster than the government claims but have not yet caught up with the actual inflation for various reasons including that the banks are not lending the money they have been given. That will come. And, of course, wages and salaries below the top of the banking and ruling classes will be the last to rise and, given the continued shift to a command economy, will likely never be as high relative to the price level as they were before the beginning of the current depression.

[blam]

FYI:

U.S. Treasury Bond 10-Year Yield Is Heading Up Above 6%

[RC one]

The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

[DaxtonBrown]

Close to staflation, but that was defined only in terms of money printing causing unexpected inflation AND high unemployment. Biflation is more than a small refinement, because stagflation is really a Keynesian concept which we know is a failure. It seems lie nitpicking, but it leads to different analysis of cause/effects and solutions.

[RC one]

interesting. definitely worth contemplating as we try to make sense out of what's happening. I still maintain that we're sailing on the edge of the known map here. Debt is greater than GDP. we have never been here before.

[RegulatorCountry]

... and they’re paying a negative rate currently. No herald of inflation, that.

[RC one]

That investors are willing to tie up their money for several years in a negative yield TIPS indicates that investors are anticipating future inflation because future inflation will turn that negative yield into a positive yield. These people are putting their money where their mouths are so to speak. It's one thing to say, I think there's inflation on the horizon, it's another to bet your money on it. It all suggests that the government anticipates inflation because they're starting out with a negative yield. That's herald of inflation right there. Go ahead and bet on deflation if you believe in it so strongly. I see inflationary forces everywhere though and so do these folks investing in TIPS as does the government that is selling TIPS. So does John Williams of shadow stats. Take a listen.