E Attacking The Everything Bubble Without Killing The Economy

The Fed simply is grinding wages downward. Mish is correct that asset inflation is a big problem. But fixing it before wages increase, over and over through time, has a disastrous affect on mainstreet!

2. Mish would like zombie companies to be washed out. These are the companies in the USA and Europe that depend on cheap Fed and ECB money. I have often wondered why he would want them washed out because that could be deflationary. And Mish warns of deflation often. Deflation is the result of asset inflation coupled with wage stagnation.

But TalkMarkets contributor Jesse Felder warns about the need to keep zombie companies afloat. I wrote about Felder:

 

For Felder, zombie companies crowd the stock market and will create a Minsky Moment. They are not the leaders. They are subject to speculation and could weaken under the interest rate onslaught. Just another concern regarding a Fed on the loose.

So, with points 1 and 2, Mish makes a case for wiping out zombies and and a stronger case for stopping asset inflation. Those arguments are forceful and worth studying. However, wage stagnation and wiping out zombies can be deflationary as well. There has to be another way besides interest rate hikes to contain asset inflation.

Solution to Containing Asset Inflation and Cooling Markets

Containing asset inflation while allowing wage increases and the survival of zombie companies would be a good thing. Thomas Palley came up with a solution back in 2014. We can look at it through an article at the Guardian:

The problem is that central banks must rely primarily on monetary policy to exert control over asset markets. Yes, regulation plays an important role but, as the late great Hyman Minsky taught us, the financial system is highly adaptive and central bankers require a cooling valve when they see markets getting too hot.

The article author, Philip Pilkington, goes on to show that the only way to slow asset markets has been to raise interest rates, but that there is a better way! He points to a study done by US economist Thomas Palley.

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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Comments

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Bill Johnson 1 year ago Member's comment

Good read, thanks. But I'm curious to know if Mish Shedlock has a rebuttal for your respectful criticisms of his work.

Gary Anderson 1 year ago Author's comment

I am not really critical of Mish. He gets the difficulty of asset inflation on main Street, Bill. It is just that popping everything has unacceptable risks worldwide. I do not know his views about Palley. Thanks for the comment.

Beating Buffett 1 year ago Member's comment

Fascinating... thanks for sharing.