Inflation is and has been the monetary policy of choice since the gold standard was completely abolished in 1971; a long-term money supply chart shows a clear uptrend with no real comeback. Traders and investors should ask themselves: what are the consequences of institutionalizing inflation as monetary policy?
1. It leads to a “bubble-free” economy. When the Federal Reserve inflates to counter deflation, the excess money supply will be directed to an asset class in addition to the deflated ones, thus leading to a new bubble. The US Treasury bill bubble is the current example.
2. A fiscal economy, not a production-based economy. The creation of money and financial markets, rather than the needs of the market, guide investment and production.
3. As the tax economy – the financial institutions that profit from the creation of bubbles – becomes the dominant part of an economy, the most important incentives are speculation and speculation.
4. This is not a tradesman's paradise. A 'pass the bubble' economy is, in many ways, a short-term trader's dream come true. When an economy becomes motivated more by monetary policy than by market demand, speculation becomes more profitable than production.
5. In line with the idea that institutionalized inflation favors traders, analytical tools such as technical analysis and short-term money management practices are becoming an increasingly important tool for forecasting price movements.
6. Since legislation and brokerage firms can steer Federal Reserve inflation towards certain asset classes, sector trading – trading based on correlation between sectors – can become more lucrative. . The proliferation of ETFs facilitates this.
Other key considerations
It should be noted that the bubbles can last for a while. In fact, there are those who argue that there is currently a bubble in Treasuries, and that it will last for a while – thus creating prolonged deflation in the economy. As always, we can look for momentum in price charts and potential outliers, 'black swan' events to understand when the bubble is deflated and how monetary policy will attempt to recover.