Okay, so I know the subject of perpetually low inflation is complicated and has perplexed financial analysts and the Fed for decades. I am wondering--what are the popular ideas as to the cause of such low inflation? Why can the U.S. Treasury issue so much debt without causing as much inflation as if it just "printed" money?
I know Keynesian economics says inflation and unemployment are inversely proportional. But of course, the economy has changed dramatically since Keynes lived and become much more globalized. One theory I have heard for low inflation is inflation is actually tied to productivity growth. Historically, domestic unemployment is just a confounding variable. There has been a lot of real productivity growth in the developing world since the 1980s (particularly China and East Asia), and debt monetization ties global productivity growth to the dollar. Developing countries buy up Western debt as a way of giving themselves legitimacy (investors will be more likely to invest in developing nations if those nations have safe assets), which has allowed developed nations (U.S., West Europe, Japan) to constantly issue debt to fund deficits and monetary stimulus without causing inflation or driving up interest rates. Since the global supply of labor and untapped productivity growth is virtually infinite, the only danger to the U.S. economy is a global productivity glut and/or a decrease in demand for U.S. debt. Neither of these is likely in the near future (since new labor is so easy to come by, and since the U.S. is so much more stable than the rest of the world).
Feel free to tear this apart, it is just an idea I heard. The question remains--is there a conceivable scenario where we see a crash in both Treasuries and stocks going forward (i.e. stagflation)? Is it more rational to be afraid about a crash in stocks than a crash in Treasuries?
Submitted October 24, 2017 at 11:02PM by UrbanIsACommunist http://ift.tt/2yMLouT
