Phorgy Phynance

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Physical asset inflation and/or financial asset deflation?

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Financial Armageddon points to the Reuters article:

Worried about inflation? Just wait

where he argues that deflation is the next big worry. I have to humbly disagree. Sort of.

I do agree that financial asset prices are due for a massive correction, but the economy is made of more than just financial assets. Financial assets will see deflation, but physical assets will see inflation.

During the “New Economy”, financial assets have soared in value and I believe, like Jeremy Grantham, that financial assets throughout the globe have experienced a bubble.

Like I’ve said in a comment or two on Panzner’s blog, during past corrections in the financial sector, China and India were absorbing inflationary pressures. That structural shift is what will make this time different. Today, China and India are net exporters of inflation and loose monetary policy in the US will create domestic inflationary pressures that have no where to go this time.

This is the rift I saw between physical and financial assets when David Richards asked me what I thought about the markets back in December of 2006. That rift has been partially corrected with the rise in commodity and energy prices since then, but I think there is a long way to go before things are neutral. As usual, things usually will not reach a nice equilibrium and stay there. Inertia will carry it through neutral and beyond. Significantly beyond.

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Written by Eric

January 20, 2008 at 9:44 pm