The New Inflation

9 is the new 8.

Tuesday is the new Monday.

Economists are the new studs.

And house prices and stock prices are the new inflation.


It's an interesting discussion being circulated on whether or not monetary policy should target asset prices. Traditionally "inflation" only referred to consumer items as a means by which to gauge whether or not prices were increasing. But that doesn't account for all the money being floated around in the system. And if enough money is floating around, prices are bound to go up somewhere.

When it hits consumer goods, we call this "inflation." And it is bad.

When it hits housing or stock markets, we call this "a bull market." And is deemed good.

The problem is, assets or consumer goods, if prices get too out of whack, then this leads to a misallocation of resources. Idiots flooded the stock market during Dotcom mania days. Idiots today leverage up 100% to buy a house or property whose plausible rents could never come close to covering the mortgage payment, thereby driving the prices further. And in both cases savings tanked.

We're in a particularly precarious situation now, where a fair amount of economic growth is due to consumer spending and a fair amount of spending is due to morons squeezing every penny of equity out of their homes.

Of course, as always, when resources are misallocated to a large enough scale, recessions occur.

But you don't want to hear that, you just go ahead and take out that remaining $10,000 in equity in your house to buy that SUV.