Tuesday, November 3, 2009
Asset-price inflation is the goal of economic policy
Capital flows into paper assets trigger debt-based speculative booms and bubbles. When the debts cannot be paid or rolled over the bubbles crumple, leading to a credit crunch, asset-prices plunges, market crashes and unemployment. But wait, governments have found ways to fix all that - except the unemployment bit. US Fed support has enabled the financial sector to maintain its debt level at $16.5 trillion while giving the appearance of deleveraging (by enabling the sector to expand its equity base). This debt level keeps asset prices artificially high so that 1) finance can maximise its profits via risky investments (normally a correction would dampen such investments) and 2) consumers' 'wealth effect' remains largely intact. Oh, and the real economy goes down the toilet.