(an interoffice email)

> the only problem i have with Meltzer is that is the consensus view now,
> that inflation is a foregone conclusion-i think long term that may be
> right (long term paper currency devaluation) but you could easily
> correct commodity and energy prices if you have a reduction of
> speculator and investor demand (ie see 1970s chart of gold and crude
> oil-there years in which the price of those commodities corrected
> viciously in a long term up trend). Specs of today in a mark to market
> world i dont believe are immune from short term negative commodity
> marks…


Two things (as Reagan would say):

  1. Crude probably stays high as Saudis are selling 9 million bpd at current prices. no reason to cut price unless demand fall off and forces them to hit bids rather than getting offers lifted. And world inventories are relatively low so it would be hard to get a sell off from physical inventory liquidation. More likely for other commodities to underperform crude in a spec sell off. Might even be happening now. (And biofuels like crude and food costs.)
  1. Even if crude/food/import and export prices level off or even go down some, they are so far ahead of core CPI increases that core can continue to go up for several quarters to close the gap. And the Fed thinks that can dislodge expectations so can’t afford to let it happen.
  1. world employment/income seems to be holding up, so actual nominal demand for consumption of resources shouldn’t collapse without some major positive supplied side shock.

Meltzer is wrong as IMHO not much is a function of interest rates; so, he’s ‘blaming’ the wrong entity for ‘inflation’. But his story is the mainstream story; so, i expect a lot more of same.


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