“The subprime crisis is the baby of Alan Greenspan: excess global liquidity,”

That’s not the story (I brought you here under false pretenses). What a great quote, though.

A huge spike in global inflation generated by China and India could lead to 1970s-style hyper-inflation in Australia, one of Australia’s largest asset managers, Queensland Investment Corporation, has warned.

The analysis of QIC’s chief executive, Doug McTaggart, charts a path to spiralling inflation, huge economic consequences and plummeting stockmarkets – with precious little central banks will be able to do about it.

Mr McTaggart’s argument is built on growing evidence that China and India are at the point of skills shortages that are driving up wage costs, with potentially dire consequences for inflation.

Deutsche Bank South Asia regional economist Sanjeev Sanyal, in Singapore, says: “It’s already the case that both these countries are seeing huge increases in salaries.

“The question is: can they they get productivity gains large enough in other areas to offset these increases?”

In a private briefing to heads of global fund manager associations in Sydney this month, Mr McTaggart outlined his bleak view that as a result of the skills shortages China and India are poised to become exporters of inflation.

“[Then] we get inflation in Australia and the US, and probably at quite high levels, and it is outside the control of the central banks,” Mr McTaggart says.

“They will be forced to raise interest rates savagely to extract the liquidity from the market in order to try to bring it under control, and I think they will fail.

“You can imagine the 1970s’ double-digit inflation, double-digit unemployment and recessionary circumstances for a long period.”

The quote came from the key to this conclusion: that central banks don’t much control the money supply any longer – hardly unexpected, given the transition to debt-backed money supplies in so many of our economies.

In Mr McTaggart’s analysis, central banks have lost the ability to respond to the consequences of hyper-inflation because their control over the money supply has been decoupled.

He said the US Federal Reserve, in particular, had responded to crises by pumping up global liquidity.

But excess liquidity had found expression in asset bubbles including the 2000 dotcom boom and the most recent subprime problems in the US.

I’ve thought, for a long time, that the US, certainly, faced this threat – not the global economy, though.


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