This week's letter: (to read the entire letter, please enter your email in the box above)
| The Slow Motion Recession Re-visited | June 27, 2008
 | | The Slow Motion Recession Revisited | | Inflation, Deflation and Stagflation | | An Update on Myanmar | | New York |
"We appear to be entering a period
of serious stagflation with sharply rising expected and actual inflation combined with large
downside risks to growth and employment." "I would argue that what we are seeing is an
acceleration of expected consumer price inflation in the context of a sharp
expansion in global liquidity. It is hardly surprising that the prices of those
commodities, such as oil, for which the short-run price elasticities of supply
and demand are low move upwards strongly when there is a rise in expected
general inflation. The oil market is a very convenient vehicle to speculate on
expectations of higher levels of general price inflation. Hence my view is that
the 40% jump in oil prices that has occurred over the past few months - roughly
the period during which financial conditions have been loosened sharply - is a
reflection of the expectation of either an acceleration of global inflation, or
a depreciation of the US dollar, or some combination of the two." - Malcolm D Knight, General
Manager, Bank for International Settlements It was only five years ago that the
central bankers of the world, and especially the Fed, was worried about
deflation. Ben Bernanke was introduced to the world at large with his famous
helicopter speech about how the Fed could deal with a deflationary environment.
Who would have thought that what passed as humor to a group of economists would
be taken so seriously by the rest of the world? Today the worry on the mind of investors and
central bankers is inflation. It is causing havoc with the markets. In this
week's letter, we look at whether we should be worried about inflation, take a
mid-year check on the economy, muse on the malaise in the stock market and
offer a very contrarian possibility for a positive shock to the world. It
should make for a thought-provoking letter.
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