Liquidity surge pushing up prices of assets

That’s where the other argument comes in—that although central banks have all been increasing liquidity, that is more than offset by the deleveraging that has gone on in the “shadow banking system”, and the closing down of the “credit factories” will mean liquidity will again not be as abundant as it used to be. The problem with that view is that stocks have been going up quite sharply in recent weeks across the world, fuelled by the reappearance of liquidity. Commodity prices, too, have moved up. Crude oil prices have improved quite a bit.

The case against inflation is pretty straightforward. With gross domestic product (GDP) growth slowing all over the world, demand for commodities has fallen off a cliff. And since the mainstream view is that the world economy is not going to go back to its previous rate of growth any time soon, the demand for commodities, too, will not rise so much. Hence, inflation will be kept in check. Another point is that the central banks may increase money supply, but the velocity of money has gone down because consumers don’t spend and as a result the excess funds do not translate into inflation in goods and services. That may be correct, but what about asset inflation?

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