What the Crisis Taught Us: More Bubbles! We Need Bigger Bubbles to Combat Deflation!

Courtesy of Mish.

The Monetarists are out in full force warning about pending deflation.

First it was Christine Lagarde with her message about the deflation ogre (see Christine Lagarde Warns of Lord Voldemort, Hopes to Put Deflation Ogre in a Bottle).

Next on the list, deflation fighter extraordinaire, Telegraph writer Ambrose Evans-Pritchard, picked up on Lagard’s commentary and screamed at the top of his lungs “More Bubbles! We need bigger and bigger bubbles to combat the threat of deflation!

Of course Pritchard did not state it precisely that way, but it is indeed exactly what he called for, in equally loud, unmistakable tones.

World Risks Deflationary Shocks

I invite you to read World risks deflationary shock as BRICS puncture credit bubbles by Ambrose Evans-Pritchard.

It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.

Tightening? What Tightening?

Pritchard calls a decrease in asset purchases by the Fed from $85 billion a month to $65 billion a month “tightening”. The claim is preposterous.

It’s very much like telling an obese child you can only have three pieces of cake after dinner, not four.

Correctly viewed, tapering asset purchases is a reduction in stimulus, not tightening.

Actual Tightening in Emerging Markets

Pritchard discussed Turkey, South Africa, India, Brazil, Indonesia, and every other country that actually did tighten recently, but he never addressed the reason they had to: inflation was completely out of control in those countries, with obvious asset bubbles in many of them. Tightening should have started long ago….

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