FERGUSON'S 2006 EXPLANATION

Tuesday, April 24, 2018

FERGUSON'S EXPLANATION 2006 GUARDIAN FOR WHAT I HAD DESCRIBED REALLY IS CONVERGENCE

"Anti-monetarists point out that the relationship between monetary growth and inflation has simply broken down. Inflation is low nearly everywhere. The latest figure for the annual growth in American core consumer prices is just 2.3 per cent, down from 3.8 per cent in May. Yet the annual growth rate of M3, which diehard monetarists have continued to track unofficially, is just under 10 per cent. Last year, according to the IMF, M2 increased by nearly 13 per cent in the UK. In some emerging markets the figure was higher. Russia's money supply grew 25 per cent.

Yet simply because consumer price inflation has remained low, money has not become irrelevant. On the contrary: it is the key to understanding the world economy today. For there is nothing in Friedman's work that states that monetary expansion is always and everywhere a consumer price phenomenon.

In our time, unlike in the 1970s, oil price pressures have been countered by the entry of low-cost Asian labour into the global workforce. Not only are the things Asians make cheap and getting cheaper, competition from Asia also means that Western labour has lost the bargaining power it had 30 years ago. Stuff is cheap. Wages are pretty flat.

As a result, monetary expansion in our time does not translate into significantly higher prices in shopping malls. We don't expect it to. Rather, it translates into significantly higher prices for capital assets, particularly real estate and equities. The people who find it easiest to borrow money these days are hedge funds and private equity firms. Through leveraged buy outs, the latter can easily acquire companies and, by improving their cashflow, boost their valuations. These guys then buy houses in Chelsea with the millions they make." NF 2006, apparently...

Even a blind squirrel, Ferguson, can occasionally find a nut!