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Inflation and interest rates

A couple of interesting reads on the topics of inflation and interest rates. Thought I'd post them together here, as these issues are interrelated. Overlooked in the minds of many investors maybe, but interrelated nonetheless.

First off, Barry Ritholtz at the Big Picture discusses some of the most ridiculous assertions embedded in the whole inflation debate (what is inflation, what isn't it?). Read, "Your personal inflation rate", and, "The Sordid Truth About Inflation", to find out how inflation is understated while growth is overstated.

Next, we have an article from Mike Shedlock that takes a long term view of the world's experiment in money printing and nonstop credit creation and the resultant asset bubbles.

A brief passage from Shedlock's article, "Gold, M3, and Willingness to Lend", in which Mike discusses the rampant monetary expansion that has taken place in recent years:

This was the biggest experiment in fiscal madness the world has ever seen. Unleashed from the "burden" of gold redemptions, credit has soared far faster than base money supply. This in turn fueled asset bubble after asset bubble, but most notably in the global equity markets and housing.

Which brings us to the main question in Mike's article. Can money printing and credit expansion continue indefinitely, keeping asset bubbles aloft? He answers thusly:

Right now there is enormous faith in the ability of the Fed to keep the bubble inflated. Inflationists fail to see that much of that credit borrowed into existence can never be paid back.

Yet somehow everyone thinks the Fed will expand money enough to matter if a credit bust happens. It has never worked that way in history. Take a good hard look at monetary base vs. M3. Interest rate policy at the Fed can not fuel that expansion forever.

The Treasury Department has massive ability to print money but it can not force banks to lend. It is important to understand the difference. Credit lending standards can only go far so far before bankruptcies and foreclosures force a change. That change is finally upon us and a huge secular reversal is now underway.

Check out the article for Mike's charts of M3 expansion and a long term look at the growth in the monetary base. Be sure to also see Mike's related article on money supply and recessions for an interesting view of the various money supply measures.

Since Mike concludes his latest article by discussing the possibility of a coming credit bust, I thought it would be interesting to include a little bit more about the background of credit and interest rates. How else am I going to learn about this stuff?

Here's an article by Hans F. Sennholz on the market rate of interest; it is a brief, but educational, eye-opener on the subject.

And since David Kotok of Cumberland Advisors, writing in the latest edition of John Mauldin's "Outside the Box" column, advises us to look to Wikipedia for their entry on "real interest rate", I think I'll do just that.

How silly of me. I almost forgot to include Sam Zell's 2005 holiday greetings card and commentary on the world's liquidity glut and the resulting global yield compression. Features a nice little ditty sung to the tune of "Raindrops Keep Falling On My Head". Enjoy.

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