Via Nicholas Bucheleres of NJB Deflator blog [12],
Over the past two decades, the United States has seen prosperous levels of income and asset price growth. With real GDP climbing steadily and the Dow Jones having more than tripled since the mid-90s, most would say that the US merely hit a road bump in 2007. And that road bump just happened to be an extremely over-leveraged financial sector that was so desperate to reap profits that they traded peoples’ lives on the sketchy asset-backed securities (ABS) derivatives market. But you can’t blame a dog for chewing through the sofa, blame the person who let the dog inside the house: the US Federal Reserve. The outcome of the next round of monetary policy will be similar to those in recent history: we will continue to set higher highs in equity markets, but asset prices and the nominal economy will continue to outpace the real economy until we see structural reforms addressed over liquidity provision. It does not appear that will be the case for a while, though. Consumer confidence is so low around the world that unless further easing is pursued, the bottom very well could fall out of the global economy. Until then, there is no ceiling to money printing and central bank financial engineering.
Welcome to the 21st century.
[13]
The outcome of the next round of monetary policy will be similar to those in recent history mentioned in this paper...
Perceived inflation will go through the roof. We’re talking about near 0% interest rates around the developed world (near-term rates in Germany hit 0% in the auction at the end of May and are expected to go negative). Oh yeah, and massive inflation. I think gold will have no trouble hitting $3,000/oz in the medium-term and I see copper tripling over the next decade. This is, of course, until we hit the next bubble sometime around 2018 and start over again. The trend remains: since the stock market crash of 1987, through the dotcom bubble, and into the real-estate & stock market bubbles of 2007, each euphoric high and ensuing crash have been more extreme than the last. These extremes are fueled by the easing that is meant to cure us. The policy that we are facing within the coming months/years will, as the trend dictates, trump them all, and so inevitably will its hangover.
From the beginning of boom and bust finance to a Fed-led evolution in crisis reaction, and from monetary transmission mechanisms to why the middle class is struggling, the following thesis provides much food for thought