India is wrestling with inflation, and much of this is attributed to the flood of global liquidity, wrought by a US Fed, which is determined to create asset price inflation in the home country. This determination is rooted in:
- the surge in bank 'assets' in 2003-07
- the rapid depreciation in the value of these assets in the 2008 meltdown
- Fed support for these assets through unprecedented bail-outs for the sector
Now the US banking system desperately needs clarity on the value of these assets, which are currently marked-to-model (convenience) rather than the more rigorous mark-to-market that can be the only prudential norm.
The question, then is whether the US, too should not be concerned about inflation feeding through to the economy, especially when so many are unemployed. The literature is full of studies that show this will not happen.
I am not convinced: