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The Triggers That Will Spark 'Hot' Inflation

Thursday, April 19, 2012, 9:15 AM
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The Triggers That Will Spark 'Hot' Inflation

by Gregor Macdonald, contributing editor
Thursday, April 19, 2012

Executive Summary

  • Rising wages in the developing world create upward price pressure everywhere globally
  • The paradox of safety: Many traditional "safe" assets (e.g., bonds) are horrible places to store capital during 'hot' inflation
  • Money velocity drives inflation -- and it has only one direction to go these days: up
  • Winning and losing assets if 'hot' inflation does indeed break out

Part I: Get Ready for 'Hot' Inflation

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Triggers That Will Spark 'Hot' Inflation

Arthur Lewis was an economist from the small, Caribbean island of St. Lucia who went on to win a Nobel Prize in 1979. His work identified the process by which very cheap labor is brought from the countryside to urban areas during phases of industrialization in developing countries. At a certain point, this supply of cheap labor went into decline and wage pressures began to mount.

Now referred to as the Lewis Turning Point, such a phase marks the end of a kind of deflationary boom, in which input costs fall during a phase of hyper-strong growth, and the beginning of inflationary restraints, in which profit margins stop growing. This is exactly what’s happening in China today.

 

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