Questioning the Aces

Alexander Green from the InvestmentU writes

“They [commodities] serve as an inflation hedge. For instance, commodity prices surged during the inflationary ’70s, then steadily declined in the ’80s and ’90s as inflation subsided.”

Now I’m not sure what exactly he is trying to say. He may just be looking for a nicer way to say “the financial asset bubble has bust and along with it all the faith and credit for which it was derived.”

Or maybe he just never understood anything. If he refers to the Keynesian term Inflation, then inflation means the higher prices of goods, read commodities. If he refers to monetary inflation then inflation in no way subsided in the 80s and 90s. In fact it surged. If he speaks in Austrian terms, then the 70s was no era of inflation whatsoever, but rather that of deflation.

“Historically, commodities have rallied when stocks and bonds are falling.”

Well, yes Alexander. That’s the way these things work. The only thing that is really falling is the asset/derivative ratio.

“But recent history has defied conventional wisdom, as history often does. Commodities have soared alongside stocks and bonds, without a major political or economic calamity, and in the absence of hyperinflation.”

I wonder if he understands how close his words are to solid reality. This my friend is how all financial asset bubbles end when there is a rush of liquidity. If this continues, the sense of monetary acceptance will wither and all financial assets, however huge in price, will become worthless – hyperinflation. If it subsides, then we will have a credit crunch no different than any other in history, possibly resulting in a depression (that’s the way the BIS put it).

The matter doesn’t depend on China’s growth, the Federal Reserve or the ability for Joe Boxer to take MEW (Mortgage Equity Withdrawals) out of his home. It is solely in the hands of those holding currencies and financial assets the world over.



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