This is a very timely topic, and something that will have economists busy for some time. One of the reasons for the lack of consumer price inflation is international trade, and the entry (re-entry?) of China and India to international markets.
In the past, when consumers had more cash, and demanded more shirts, pans, cars, etc., prices of such items went up. Supply and demand, as we say. What is new nowadays, is that there’s an almost infinite supply of labor in those emerging countries. If Americans want X millions of shirt, that’s no problem, they can be produced without pushing wages in those countries. If consumers want twice as many shirts, then more workers are recruited at the same (low) wages, and therefore, shirts don’t become more expensive.
We have enourmous liquidity in the system, but it has only resulted in asset inflation (think real estate, gold), but the prices of everyday consumer items have not gone up; if anything, they have dropped!
This has serious implications for the collapse in real estate prices many of us anticipate. If there is really an oversized amount of liquidity floating around, and if consumer prices won’t go up because there’s unlimited labor (an almost perfectly elastic supply curve), then house prices may remain overpriced when measured in dollars.
Perhaps it’s not really that house prices have doubled entirely because of an speculative bubble. House prices may have spiraled in recent years mostly because dollars are more plentiful. Supply and demand applies to dollars too: if there are too many of them around, their value will drop. How do we know dollars are less valuable now than five years ago? Answer: Half a million dollars buy about half less house today than back then.
I’m not saying that there wasn’t speculation in RE. There was plenty of it. But other mechanisms, such as asset inflation in a context of easy money and cheap overseas labor, may have had a larger role than previously thought.
JG: Care to clarify your assertion that “cheap loose money kills manufacturing competitiveness”? I would think, that if anything, cheap loose dollars would boost US manufacturing competitiveness by making US products relatively cheap to foreigners.
