Mar 18 2008
Another Index Needed?
The Fed is pouring money into economy like crazy. Are we in another Greenspan-ian Samsara now?
Some economists start to worry about inflation now:
“The good news is that this will take pressure off of housing prices,” said Kenneth Rogoff, an economics professor at Harvard University. “The bad news is that it will be very painful to squeeze the inflation out of the system when this mess is all over.”
Rogoff is an advisor to an econ professor in UW who I took an under class from. But the proximity ends there. If he’s a NBA star then I only play suburb pickup games. However, I do question his underlying assumption that excess money supply will cause board price level increase, particularly that of commodities (i.e. inflation by classical definition).
It is not what happened in the last/current cycle. After Alan G. dramatically increased money supply after 2001, inflation has been under control. The excess money went instead to asset speculation which is the root cause of the current mess we are in.
The problem with asset bubble is that it is no less destructive than inflation but is not as feared as inflation. Therefore, I am thinking, does it make sense to create some kind of index tracking bubbles in economy just like CPI is used to track inflation?
Here is an update:
The commodity price plunged today. Is this another bubble that is popping? So much money has went into the trade to hide from fading dollars and stocks. But that is not the worst. Most recent troubles all started with hedge funds taking highly leveraged positions in one sector or another. Given the recent momentum of commodity price, I wouldn’t be surprised to see the prices go down much much further as the hedge funds unwind their positions in a harry.