Stealth Inflation

David Jensen explains how the Fed can expand the money supply at twice the rate of economic growth, over a period of decades, all the while keeping price inflation low (so far ...)

DECEPTIVE WARNINGS - Nearing Economic Disruption, the Fed Distorts Perception by David Jensen December 8, 2005

Selected exerpts:

"It appears that the Fed believed that it was free from constraints of moderate money supply stewardship because of a confluence of several factors:

• The importation of cheaply priced Chinese consumer products produced with the benefits of $0.50 hourly labor rates and lax environmental and labor laws created a wage pressure mechanism to temporarily contain price and wage increases in the US economy;
• A belief that skewing inflationary perception could contain consumer inflation expectations and thus limit activities such as hoarding and forward-buying that spur inflationary pressures if price inflation is detected;
• A reliance, in the late 1990s, on temporary increases in economic productivity to helped contain price pressures; and
• Starting in the late 1970s and continuing through the 1990s, liberalization of financial markets (as identified by Peter Warburton in his book “Debt and Delusion”[10]) allowed the massive pools of capital (money) that were created by Central Banks (US, European, Canadian, etc.) to move into financial instruments such as bonds, stocks, currency markets, and derivatives. This inflated the values of these markets, drew further investment, and hid the monetary inflation of the central banks as consumer goods prices increased relatively slowly in comparison. According to Warburton, the world bond market grew from $1 trillion in 1970[11] to more than $50 Trillion today. World stock market capitalizations now approach $30 Trillion; during the first 6 months of 2005 alone, financial derivatives grew 16% (or at a compounded 35% annual rate) from $9.45 trillion to $11 trillion[12] and through financial gearing now exceed $270 trillion in underlying asset value - more than 500% the world’s total annual GDP; and the world’s currency trading markets now generate $2 trillion in activity or roughly 17% of the US’ total annual GDP, per day. These ballooning financial repositories, now totaling more than $100 trillion, absorbed waves of capital created by central banks with their elastic currencies thus temporarily mitigating the inflationary impact on consumer prices and seemingly creating a Shangri-La economy.

The above factors are not long-run factors that can continue indefinitely to contain pricing pressure post decades of aggressive expansion of the money stock by the Fed and other Central Banks. Because the money stock growth has been hidden with temporary techniques, whether the Fed reports M3 in the future misses the point entirely. Inflation has already been created but hidden with temporary market phenomena and measures.

All this new money got sucked up into the stock market, then real estate, and now what? Commodities?