Best of DOUG NOLAND

BEST OF DOUG NOLAND

August 16, 2005

It is my view that the Global Inflationary Boom scenario is especially problematic for the U.S. For one, our policymakers have argued for some time that the U.S. Trade Deficit and global imbalances, generally, could be rectified by stronger growth overseas. It is becoming increasingly apparent that a more robust and synchronized global expansion will, first and foremost, precipitate spiking energy and commodities prices and future shortages. Truth be told, the services-based U.S. economy is ill-structured to enjoy the fruits of a global boom, but will instead pay an enormous price to satisfy its insatiable energy needs.

Importantly, the character of the unfolding Global Inflationary Boom ensures only more extreme U.S. and global imbalances. Our hollowed-out manufacturing sector has limited capacity at this point to further ramp up exports, while surging energy costs and generally rising prices will be maintain an inflationary bias for our imports. Rather than working to rectify our massive Trade Deficits, the unfolding Global Inflationary Boom assures that our predicament only worsens. And, let there be no doubt, a continuation of these deficits will only further stoke unstable global growth, inflationary pressures and market distortions (why they’re called Bubbles!).

At least since the late-eighties, the Federal Reserve has enjoyed the luxury of applying monetary policy irrespective of global factors. The bursting of Japan’s Bubble and the collapse of socialist economies created global economic slack and disinflationary pressures to last a decade. This afforded the Greenspan Fed great flexibility to run a perpetually accommodative monetary policy. These days, analysts mistake the effects of massive global manufacturing investment (a Credit Inflation Manifestation!) for a continuation of the nineties "disinflationary" environment. This is a major analytical error.

Unprecedented global production capacity may have a restraining effect on the prices for autos, computers, flat-panel televisions and the like. However, the prominent pricing pressures manifest in the markets for the energy required to power the endless supply of products (and manufacturing capacity) distributed lavishly across the globe. These pressures and expanding shortages have incited a global energy investment boom, a boom that puts further demands on key resources while providing another expansive avenue for Credit expansion. All the while, the U.S. Credit Bubble, global central banker accommodation, unlimited ("contemporary") global finance and a ever-expanding pool of global speculative finance guarantee more than sufficient monetary expansion to validate the inflationary boom. We have witnessed the U.S. Credit Bubble spread methodically to Asia, Latin America and now to the Middle East and Europe. Credit Inflation Manifestations spread from U.S. stocks and bonds to American real estate to global securities and real estate to energy and commodities. Powerful Monetary Processes have taken hold that will stubbornly disseminate inflationary fuel and expanding pricing pressures. And while the environment admittedly offers sufficient data points for adherents to cling to the "disinflationary" case, this argument founders when it comes to deciphering the key facets of current financial, economic, and speculative dynamics.