Again seeing global economy, it could be argued that although inflation was not appearing in CPI figures, it was already visible in asset markets as artworks, equities, bonds and property all performed well from 2003 to 2006. Central bank monetary policy remained benevolent with tentative rate hikes since policy markers targeted growth rather than the latent inflationary pressure. Paradoxically, Asian central banks kept interest rates extremely low in real terms given their mercantilist backgrounds, and stoked inflationary pressure by running food and fuel subsidies at home.
Current macro economy is now facing the prospect of the triple shock of an extended credit crunch, high inflation and slowing growth; the very three objectives central bank policy is designed to overcome. Meanwhile asset prices are under pressure from not only the unwinding of the goldilocks period as central banks continue to lift short interest rates but also from rising long-term rates as governments see a diminishing of their current account surpluses due to high oil prices and a reduction in capital flows due to increased risk aversion and deleveraging.
Next question: Do you optimistic for all of this?
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