The other half of the problem is the part caused by changes in the balance of supply and demand for goods, causing higher relative prices for those goods. This half of the problem needs continued attention from all of us. It remains a national problem; if one that may have never been satisfactorily resolved in practice. Only national governments have the powers to force acceptance of the relative price changes – so minimising the damage from sustained inflationary pressure – or to delay acceptance with the increased ultimate damage that implies. Forcing accaptance requires a national political bargain; a bargain which may compensate some losers, but can only do so at the expense of winners and/or those with less political clout. The only clear point is that compensation must not attempt to work through price controls or subsidies directed at the goods whose real price has risen.

Attempts to blame speculators for either half of the problem are just scapegoat hunting; and should be despised accordingly.

With extreme leverage and this Fed guarantee, speculators could confidently borrow short and lend long at very low rates. Why would long rates go up with such a backdrop?

While there’s no consensus on a smoking gun to explain global inflation, I go back to “always and everywhere a monetary phenomenon.” The US credit bubble, entirely the fault of the Fed, is the primary cause of global inflation. Credit here is spent on imports, which result in money growth overseas and inflation. Many other countries have poorly chosen to keep their currencies suppressed and promote inflation in their economies. But global inflation is primarily a dollar phenomenon. Stronger currencies in China and India may limit their internal inflation, but will only increase global inflation.

And in my opinion there is an ongoing myth about long rates being caused by FCB demand. Long bond rates were low only because the Fed made their short rates always predictably low. When clear short rates would never rise dramatically, long bond holders cannot expect high rates to compensate for that risk. This was an extraordinary era of liquidity, brought to you by an Fed that promised helicopter money. With extreme leverage and this Fed guarantee, speculators could confidently buy long bonds at very low rates. Why would long rates go up with such a backdrop?

Spectator. We all have our biases, myself included. The Fed — especially the Greenspan fed — never believed its mission was to crush excessive speculation. it argued instead that you couldn’t tell a priori what was “excesssive” speculation and what was natural market exhuberance in a dynamic economy. Moreover, the point I made above isn’t necessarily in contradiction with an argument that the Fed was too loose (both in terms of its interest rate policy and its approach to regulation) during the buildup of the loosing policy. The point above was simply that for any given Fed policy path, ongoing reserve accumulation outside the US meant the policy was effectively more stimulative than it otherwise would have been b/c of non-market/ reserve based demand for treasuries which helped hold Treasury yields down.

Dollar pegging impacted the US by holding long rates down and keeping the exchange rate up — and thus made the interest rate monetary transmission channel stronger.

There is always a tendency to argue that noting this shifts blame away from the US. That may be the effect, but it is not the intent. The intent is simply to recognize how the widespread decision to peg to the dollar impacted the US during the 02-06 period. I don’t think it makes sense to try to deny that there was an impact, or that the direction of that impact was to stimulate interest-rate sensitive sectors of the economy. The modality the PBoC choose to stimulate Chinese consumption was to stimulate the housing sector of the US by buying up massive quantities of US Agency bonds.

Finally, i strongly believe that the US isn’t responsible for the rise in inflation globally. A set of countries have by their own choice continued to peg to the $ even as their economies boomed and the US slowed. They could adopt a different exchange rate policy, one which would allow them to adopt a monetary policy more suited for their domestic conditions.

This statement implies to me that global inflation is just beginning & provokes me to ask again if there is a decent measure of global money supply.

I have previously cited the IMF stat that the world’s total foreign exchange holdings had more than quadrupled in the last 10 years as world GDP had roughly doubled. To my question as to whether these ‘reserves’ were a decent proxy for global money supply, Dr. Setser noted that some reserved were sterilized. Previously I think it was indicated that China tends to sterilize about half its reserves, which still leaves pretty massive creation of fresh money.

A measure of global money supply growth strikes me as eminently useful. Excessive money/credit creation seems a more probable explanation for widespread negative real interest rates than a ’savings glut’.