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Inflation is always and everywhere a monetary phenomenon.
Milton Friedman.

How imbalances led to credit crunch and inflation
Martin Wolf, Financial Times, June 17, 2008

Inflation is a sustained rise in the price level: the result of too much money (or purchasing power) chasing too few goods and services.
A one-off jump in commodity prices is not inflation. Nor need such a jump cause inflation.
But a continuous rise in the relative price of commodities is a symptom of an inflationary process.

Yet how can we have an incipient global inflationary process when the US economy and those of other significant high-income countries are slowing down?
The proximate reason is that they matter far less than they used to.

Trade deficit is contractionary: for any given level of domestic demand, it lowers domestic output.
Thus, the US needed to expand domestic demand, in order to offset the contractionary effect of the external deficits.
Some groups within the economy needed to spend more than their incomes. The most important such group turned out to be households.
Thus the growth in US household indebtedness that led to today’s “credit crunch” is a direct result of the global imbalances.

Ben Bernanke is running the monetary policy of the People’s Bank of China. But the policy appropriate to the US is wildly inappropriate for China and indeed almost all the other countries tied together in the informal dollar zone or, as some economists call it, “Bretton Woods II”.

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The credit crisis and how to survive it
"When Markets Collide: Investment Strategies for the Age of Global Economic Change" By Mohamed El-Erian
Review by John Authers, Financial Times July 27 2008

Few people are as well positioned to understand markets as Mohamed El-Erian. He is almost unique in being able to attack the credit crisis from the perspectives of academic economist, policy official, investment banker and fund manager. He has the global perspective of an Egyptian long resident in the US whose area of greatest expertise is Latin America. And his success, as an academic who came relatively late in life to fund management, gives him credibility – after a brief stint running the Harvard Management Company, the biggest university endowment, he finds himself joint chief executive of Pimco, the giant fixed-income manager.

Mr El-Erian avoids the polemical tone that permeates many of the books that have so far covered the crisis and avoids over-simplification. From where he is sitting, the world looks complicated and he attempts to put the tectonic shifts into perspective.

For investors, key recommendations for surviving the next year involve allocating assets on the assumption that you will not be able to make any changes for the next three years. This forces a conservative mindset. He also calls for a new approach to choosing assets that starts with assessing the risks involved with each asset class, rather than the returns.

He strongly recommends buying “tail insurance” – contracts that protect against the extreme market events now generally known as “black swans”.

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Black Swan

How best to manage the global imbalance problem
Mohamed El-Erian, FT June 17 2008

The writer, co-chief executive and co-chief investment officer of Pimco, is author of
"When Worlds Collide: Investment Strategies for the Age of Global Economic Change"

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Why this crisis is still far from finished
Mohamed El-Erian, Financial Times April 24 2008