Wednesday, May 21, 2008

Why all roads lead to inflation

 Source: msn money
A combination of global expansion and money printing to avoid today's economic pain has set us up for tomorrow's spiraling prices.

By Bill Fleckenstein

'Inflation is a topic that does not receive enough attention. I'll try to address that deficiency in this week's column.

Regular readers know my motto (which is on the masthead of my Web site): "In a social democracy with a fiat currency, all roads lead to inflation." Over the past couple of decades, through all the occasional chatter about deflation, I have resolutely maintained that deflation would not be the outcome we would see because the Fed would do what the Fed has done.

One major force helped hold inflation at bay during the 1990s: globalization. As Jim Grant points out in a brilliant essay titled "The Close of the Era of Peace and Quiet" in the current Grant's Interest Rate Observer (subscription required):"Between the early 1980s and the late 1990s, an estimated 2 billion new pairs of hands had joined the global labor force. Employers never had it so good, especially so in countries like the United States, where relocation to low-cost meccas of the East was no idle threat, but an actionable business plan."

Cheap labor, when combined with the technological advances of the late 1990s -- which were powerful, though no more potent than those we'd seen in the 1920s and 1960s, for instance -- helped offset the Federal Reserve's money printing.

However, in the wake of the stock bubble, that money printing set off the U.S. housing boom and began to cause different consequences...'

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