Not waving, but drowning

An interesting article by Hamish McRae in the Sindy suggests that national banks will need to face up to the new problem of globalised inflation.

He identifies the roots of the problem as lying in two places. Low interest rates in the developed nations and excess savings from oil rich states and Asia.

But isn't the problem also structural as well? McRae doesnt really address why liquidity has become such a global issue. For a start, the level of liquidity in the market is huge, and has been so for four years. Not only that, but market liquidity volatility is low, as the graph (bank of england stability report) clearly shows.

What marks this 'boom' out, is that it doesnt have all the unpredictable characteristics of previous booms - so far, it's been stable.

The markets are certainly awash with petrodollars and Asian savings, but crucially these are being fed through an increasingly complex derivatives network that is feeding a huge credit cycle.

In very simple terms, debt instruments such as CDOs are effectively breaking down market inhibitions and allowing capital to pour into areas which might previously have been out of bounds. The credit markets have undergone a huge growth in the past four years and are starting to develop a logic all of their own. Maybe this is why inflation in the UK's economy is proving a little more resistant to interest rate hikes than previously.