Bubble, Bubble, Toil and Trouble
Where rising consumer goods were the primary result of monetary inflation during the 70's, we have witnessed a rise in the price of assets, which many have regarded as an increase in wealth. What needs to be remembered that this is only the case if one can find a buyer. As many homeowners in the US are beginning to experience, when there is no more buyers, prices drop, and can do so precipitously.
In the 70's we saw a price-labour spiral where workers demanded more wages because the cost of living had gone up. With labour costs being a large component of the production cost, those higher wages in turn caused subsequent higher prices thereby continuing the cycle.
From the 90's till now we have principally seen an asset-loan spiral where people have borrowed money at increasing levels in order to speculate on assets such as real estate and stocks. It has been said that the worst loans are made during the best of times - and this will prove to be no exception. Wages have risen only marginally and the costs of many goods have been kept relatively low due to international out-sourcing of manufacturing jobs.
The current problem facing the USFed is the on-going balancing act of maintaining interest rates at a level that won't collapse the economy in order to protect the value of the paper money they continuously inflate and thereby devalue. The notion of the Fed as being an "inflation fighter" is completely absurd given that they are the very ones creating the problem in the first place.
In essence, the US has been exporting its inflation, with China and Japan being the main buyers, in return for consumer goods. A game that will be good for the United States so long as foreigners continue to value the paper.
As the dollar continues to become more abundant and unavoidably devalued, commodity prices will continue to rise. The only way to starve off this result is to decrease the money supply, but doing so will reduce bank lending and bring an abrupt end to the practice of borrowing money to speculate and a collapse in real estate and the stock markets.
Consumers and speculators are so indebted that any further increase to the interest rates will result in further increases to already record levels of insolvency.
The global fiat monetary experiment that has been on-going since 1971 is one that I feel will not have a pleasant ending. I believe that at some point there will be global recession caused by declining asset prices in equity stocks and real estate, a downward revaluation of fiat money and subsequent increase in commodity prices, a reduction in the standard of living in the industrialized countries, and a major collapse and restructuring of the financial sector as large amounts of bad loans are written off.
I believe this will occur even without the external impetus of a military and/or terrorist attack that would expedite and increase its severity.