Minyan Mailbag - Buzz Banter
Question for my fellow professors:
If Elmer is intent on inflating his (our) way out of debt, the dollar will clearly devalue and relative values of equities will decrease in kind. But does that neccesarily mean that stock prices "need" to go lower?
I ask this as a devil's advocate with hopes of poking holes in my own bearish bent.
The nominal value of stocks do not have to go down, and may even continue to rise as long as the credit markets accept this scenario: an ever decreasing relative value of a dollar, that "thing" in which they will recieve their debt payments, both interest and principal.
At some level any rational entity would begin to refuse payment as such and would demand a higher rate of interest. It is these higher interest rates that would cause a decline in equity prices.
If the Fed undertakes an aggressively inflationary policy to explicitly lower the 'real' debt load of U.S. consumers (remember that corporations are sitting on a huge $600 billion in capital that, for whatever reason, they are not spending) that excess money will most likely make its way into ALL goods: commodities, asset prices, consumer goods, etc. eventually. What has been remarkable over the last 10 years or so is that the aggressive liquidity expansion the Fed has undertaken has only manifested itself in higher (steeply higher) asset prices but not (at least not yet anyway) steeply higher consumer goods or even commodities. After all, the SPX is still up a whopping 75% from 1996 while the CRB index is only up 10%.
The point is, the Fed has been inflating for a long, long time, but for reasons that are hotly debated among economists (well, Austrian economists anyway), that inflation has only really affected asset prices and not commodities, producer goods or consumer goods (again, as yet).
If the Fed attempts to increase their inflationary efforts even more, it remains an open question whether that 'new' credit will make its way primarily into the real economy or the financial markets or both. Past may or may not be prologue.
But understand that such an effort, whether it leads to higher asset prices (that is higher stock prices which are just another manifestation of monetary inflation) or higher consumer goods prices will eventually lead to economic ruin. On that there is simply no debate; as it is just a matter of time.
The laws of economics can only be ignored for so long.
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