Financial markets can channel liquidity directly into inflation

Most analysts argue against inflation on grounds that excess capacity due to slumping demand will keep inflation in check. Hence, they say, the liquidity boom won't be a problem until the global economy has fully recovered. Andy Xie thinks this is faulty logic. Financial markets can channel liquidity directly into inflation through commodity speculation.

Despite declining oil demand, for example, prices have nearly doubled from their lows this past spring. This mainly reflects rising financial demand; a rising amount of liquidity has flowed into oil futures, which is being powered by expectations of inflation. As in the 1970s, these expectations alone are capable of turning liquidity into inflation.

Rising labor activism is another source of inflation. Most think labor unions are no longer an important force because their influence has waned over the past three decades. I think labor union power is driven by demand rather than supply. During an economic boom, few are interested in supporting labor unions. But in hard times, workers are more supportive of unions.

Full article:
http://english.caijing.com.cn/2009-05-25/110170757.html

at 5/28/2009 Labels: , ,

2 comments:

  Admin

May 31, 2009 8:47 PM

what is your view on the stock market rally? is it sustainable? or a sharp correction is due?

http://forex-all-online.blogspot.com/

  Rightsider

May 31, 2009 11:22 PM

I'll let VIX, USD and bond yield guide me. And I don't make prediction, trailing stops will help. I am long of Asian equities and commodities, but protected with a put options.

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