๐Ÿ”บ Why Asset Price Inflation Alone Will Not Lead to an Inflation of Goods and Services

There is the financial economy and the real economy. The two are typically tethered together, however, as a result of the Covid-19 induced recession, it is apparent that there is a disconnect between the real and financial economies given the disparity in GDP, unemployment, SME/Corporate bankruptcies on the one hand, and rising asset prices on the other. As a result, many speculate that the rise in asset prices alone will lead to rampant inflation in goods and services as a result.

Please subscribe and email me for the passwords for the following analyses/essays/models:

How the Economy Works, New Credit Creation, Borrowing vs. New Credit Creation, Velocity of Money, Real vs. Financial Economy, & The Catch-22 of Leveraging/De-Leveraging https://internationalcapitalmarkets.org/2019/10/23/%f0%9f%94%bahow-the-economy-works-new-credit-creation-borrowing-vs-new-credit-creation-velocity-of-money-real-vs-financial-economy-the-catch-22-of-leveraging-de-leveraging/ via @Diamond1_CEO

New Model: The Dynamics of and a 11 Factor Model for Inflation https://internationalcapitalmarkets.org/2019/09/09/the-dynamics-of-and-a-model-for-inflation/ via @Diamond1_CEO

Interplay and Limitations Between Age Cohorts, Investment Needs, Search for Yield, and Institutional Confines https://internationalcapitalmarkets.org/2019/09/05/interplay-and-limitations-between-age-cohorts-investment-needs-search-for-yield-and-institutional-confines/ via @Diamond1_CEO

Implications of Global Protectionism, Why Negative Yielding Bonds Will Never Increase Spending https://internationalcapitalmarkets.org/2019/08/20/implications-of-global-protectionism-why-negative-yielding-bonds-will-never-increase-spending/ via @Diamond1_CEO

New Model: Calculating Minimum Wage and Poverty Line https://internationalcapitalmarkets.org/2020/08/07/a-new-model-for-calculating-minimum-wage/ via @Diamond1_CEO

For simplicity, credit that is created flows into the real economy leading to GDP which then circulates in the economy based on the velocity of money. The degree of circulation or velocity of money is fairly stable, notwithstanding an increase in the money supply for non-GDP activity which leads to asset price inflation. As an aside, a disconnect between asset price inflation and GDP typically portends a crash moreso than inflation.

That being said, a portion of the money that circulates is saved which goes into the financial economy. As the real economy grows, so does the financial economy. This is a process that works from the inside-out.

When assets are inflated, this is an outside-in approach. However, the manner in which the inside-out process works is not necessarily the same as the outside-in approach. Additionally, the distribution of wealth and the marginal propensity to consume need to be taken into consideration when assets are inflated.

As a result, the only two ways for rampant inflation to occur when assets are inflated is 1) Borrow against the collateral or 2) Sell-down the assets. Proposition 1 would lead to inflation first because proposition 2 leads to a collapse in asset prices. Given the above, it is unlikely asset inflation alone will lead to rampant inflation for goods and services.

Published by Diamond1

I have an extensive background throughout the financial spectrum with high-level experience on the sell-side, high-net worth private banking, portfolio management, international finance, public pensions, VC, PE, and economics. I enjoy working and collaborating with people that I admire and trust.

"Fit Models to Problems, Not Problems to Models"

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: