Why We're All LinkedIn to Inflation
We've all been reading a lot lately about the rise in worldwide commodity prices--including, yes, four-dollar-a-gallon gasoline--to which Fed Chairman Ben Bernanke's quantitative easing has so mightily contributed. In today's Wall Street Journal, a fascinating--and really very alarming--column by Andy Kessler. Inflation isn't just driving up the price of oil and corn, Andy writes. It's fueling the current joyride in high tech IPOs, as witness LinkedIn's going public at $45 a share. An excerpt:
[Z]ero interest rates are not real--they are a construct of the Fed, not the market, and they are dangerously distorting the crucial capital-allocation process. Now capital will inevitably be over-allocated to growth companies, good and bad. Enjoy the ride, but buckle up.
In other words, investment, innovation, and, ultimately, job creation all depend on the efficient allocation of capital--which the Fed is now royally messing up.
"Enjoy the ride" applies to the likes of Mark Zuckerberg.
"Buckle up"? That's for the rest of us.
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Jul '10
Re: Why We're All LinkedIn to Inflation
Peter, consider the three-year rise in commodities, including precious metals, which are basically hedges against inflation. All the money being invested there is unavailable for investment in enterprises that produce wealth and create jobs.
May '11
Re: Why We're All LinkedIn to Inflation
They do allow for increasing numbers of humorous G. Gordon Liddy gold commercials though and who isn't for more of those?
Oct '10
Re: Why We're All LinkedIn to Inflation
Oil's leveled out, so I think inflation is peaking. The Fed is unusually open about inducing a "search for yield," this time around. There are some justifications; with the housing market in such a downturn, the main outlet of bank credit isn't available (for both consumers and small businesses, who borrow against property). That leaves the equity and corporate debt markets as the only means of channeling savings to productive enterprises.
The Fed's solution (pricing dysfunctional credit markets below inflation) is hitting a nail with a sledgehammer. To make matters worse, under floating exchange rates higher interest rates can actually reverse needed economic adjustments, lead to bubbles as foreign investors search for yield, and produce a "phantom" drop in inflation since foreign borrowing is deflationary (again, under floating exchange rates; it's inflationary under fixed exchange rates).
Oct '10
Re: Why We're All LinkedIn to Inflation
I forgot to add, you can prevent a foreign borrowing bubble from high interest rates, by tightening fiscal policy (deficit reduction). I'm not arguing higher interest rates are bad, but they are a two-edged sword so long as we remain fiscally irresponsible.
Edited on May 27, 2011 at 12:50pmNov '10
Re: Why We're All LinkedIn to Inflation
But, by taking the money out of circulation, they keep prices lower for everyone else, thereby opposing the malign impact of quantitative easing (assuming the money created creeps out of the banks' excess reserves).
Also, by saving at all, gold bugs etc. are not consuming; hence, they leave more wealth for everyone else to consume.
Edited on May 27, 2011 at 1:48pmAug '10
Re: Why We're All LinkedIn to Inflation
45 bucks a share for Linkedin? It is already the butt of a joke.
Deja vu all over again.
Sep '10
Re: Why We're All LinkedIn to Inflation
So if I buy gold from G. Gordon Liddy, what is Mr. Liddy doing with that money? How is giving money to someone else in exchange for gold taking money out of circulation? I understand you may have been attempting to be brief in your comment, but I think it's a little misleading. Let me explain:
I may be wrong here, but what I buy has no impact on the money supply. To impact the money supply, either the Fed must tighten or loosen its monetary policy, or I must start smoking cubans lit by greenbacks while I enjoy the ambiance of the Ricochet faculty lounge, all illuminated by a conflagrating pile of money in the fireplace. Seriously though, buying commodities as a hedge against inflation, which if several people do this raises the demand for those commodities, simply changes the value of dollars relative to the those commodities—aka the price.
(continued below)
Edited on May 27, 2011 at 5:45pmSep '10
Re: Why We're All LinkedIn to Inflation
I think what you meant is instead to comment on capital allocation? Because the price of certain commodities like gold and oil is rising, it will trigger further investment in the extraction of those resources as marginal quantities become profitable, like the investment in the tar sands that was spurred by the spike in the price of oil five years ago. Additionally, it will trigger speculation in further price increases as investors attempt to hedge against further decreases in the value of greenbacks (see Mr. Liddy and Beck).
Capital is being directed from investment in certain business and redirected to investment in production of certain commodities and in methods of hedging against inflation (and business that provide such hedging services).
As the treadmill spins faster, everyone starts running faster to stay standing, but no one is really getting anywhere. Monetary stimulus appears to get the economy going, but that's only in terms of busywork like digging useless ditches or planning contingencies to mitigate inflationary risk. No extra wealth is being created, just like running in place on the treadmill isn't getting you anywhere.
Demanded goods and services are the measure of wealth, not the fruits of monetary onanism.
Edited on May 27, 2011 at 4:48pmSep '10
Re: Why We're All LinkedIn to Inflation
Wrapping my comments up, I do agree with everyone here that the Fed's policy of quantitative easy, a Orwellian name for printing more money, is doing many harmful things like stealthily taxing savings and other prudent practices that postpone consumption now for later (a tax that finances further feckless government spending) and enriching favored insiders like Goldman Sachs that get first access to the newly-created money and can thus spend it before its value is realized to be less because there is now more money.
One of the other harmful things this monetary expansion is doing, in addition to robbing us all in seen and unseen ways, and which you correctly alluded to above, is distorting the allocation of capital in our economy and further robbing us now and later as we build what no one wants and buy what no one desires, all in an attempt to stay one step ahead of Bernanke’s monetary bull-whip.
What's key to understand, though, are the mechanics of what's going on so one can better comprehend the impact of this policy: in this case, there is now more money misdirected, not less money hoarded or destroyed.
Edited on May 27, 2011 at 5:32pmJul '10
Re: Why We're All LinkedIn to Inflation
Please forgive the off topic comment, but I would like to suggest a guest for both guest Ricochet contributor and for Uncommon Knowledge: (I know you're following this conversation, Peter and it's at least tangentially related) Financial expert and AEI fellow Peter J. Wallison. I find it distressing that so many still place 100% of the blame for the financial meltdown variously on bankers, Wall Street and "greed" and even the free market itself and none of it on US Government housing policy; even one who is as seemingly intelligent as actor/director Harry Shearer does so and stubbornly refuses to consider any other possibility. An interview is much easier to get people to watch than say, the dissent that Mr. Wallison wrote to the majority report of the FCIC.