Monday, June 02, 2008

Why interest rates should increase - and (IMO) probably won't

Hundreds of millions of Chinese, Indian, Vietnamese, East European and other emerging market workers and many millions of enterprises have entered the global marketplace as suppliers of goods and services that are competitive with those produced by the UK (so-called "core" goods and services) and as demanders of commodities, especially energy, metals and food (so-called "non-core" goods). As a result, the price of energy, food, metals and other commodities, relative to that of manufactures and services, has risen.

Willem Buiter gives a beautifully clear and concise view of the factors affecting inflation and argues for an increase in lending rates.

But the hard, narrow path upward is often avoided, especially in "democracies" where the governing party feels its hold on power slipping.

Besides, a depreciating pound is helping maintain orders for what remains of our manufacturing industry. Why halt the pound's fall?

Maybe we should start doing our FTSE charts in Euros, so we can see the real effect of rotting currency. Like Alice and the Red Queen, when the stockmarkets stand still, they are actually falling back, once you price them against the rest of the world's money.

I note that Mish used the Red Queen's Race analogy two years ago, and presciently outlined the monetary and economic dilemma for the USA - and, I suspect, the UK:

Bernanke is trapped in "Wonderland" but unlike Alice has no way out.Bernanke gets to choose between hyperinflation and deflation. The moment he can not run fast enough, the US economy will implode. If he runs too fast, the value of the US dollar as well as the FED's power will both come to a very abrupt stop.

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