Before pointing to the empirical evidence and simply dismissing the rumors, try to recollect the hordes of inflationistas, when Bernanke first pressed the green button, screaming that crippling inflation was "right around the corner." Fine, now that the inflationistas have been deprived of media coverage and are standing on shabby soap boxes in dark forgotten corners of the market, perhaps it's time to revisit their argument, incorporate the new data, and proceed to demolish their flawed theories and declare the marriage of MS and LIE a blessed union.
First, acceptance of basic economic theory would make inflationistas out of all of us. It's obvious, if more money is around, then people will be able to spend more. Equally obvious is the fact that as people have the capacity to spend more, both the demand and prices for goods and services increase, which, obviously, means we'll end up with inflation. In turn, central banks wake up and crank up rates to control everyone's profligate spending. It would be fair to say that pre-2008 economists would, as an aside, throw in a few caveats, they might talk about "increased productivity", "velocity", and "liquidity" - they might even talk about how hard it is to actually quantify the various forms of money supply, but it's not credible to claim that anyone would have called for low inflation year after year even as the presses run short of paper. How unimaginable the current situation is, is clearly demonstrated by the round of higher rates imposed by central banks after the first round of easing - to combat the "inevitable" threat of inflation.
So, what went wrong with the inflation theory, or, from the perspective of the MS and LIE union, what went right? The consensus is that the "caveats" grabbed their chance of stardom and stepped into the spotlight: in China, Apple have indeed made some new stuff which translates into "increased productivity" (if we look really hard we may find other examples of increased productivity too); and money really did not go very far or fast despite the red hot printing presses, emergency central bank and interbank facilities. Basel, in its various national incarnations crippled leverage and transformed banks from conduits into sponges, and, by the way, since your company is not Apple and able to point to "increased productivity", you can't, under any circumstances, borrow any of the money. Economists can now declare victory, pointing to the combined impact of decreased velocity and a liquidity trap of truly historical proportions. This victory preserves MS and LIE while burying the inflationistas and their simplistic theory in a grave simply marked, "Beware the Caveats".
Now for something completely different, how about we decide to forget about the inflationistas, economists, and central banks - let's walk into the nearest public drinking establishment and try to convince people to invest. OK, this might not be very professional, but in terms of discovering what people think about investing its better than listening to the news or economists - remember, these fellow drinkers are your primary sources, and if you listen they'll tell you what they think (sometimes they won't stop... but that's another issue). At the end of the night, or several nights (depending on the value you place on your liver versus statistical significance), you might conclude that people are more afraid than greedy.
If the markets are driven by supply and demand, fear and greed, and if the average person has somehow managed to influence politicians, regulators and investment managers - then the lack of market speculation can solely be attributed to "fear". People don't want to lose again, and they've learned that no one is to be trusted. Markets suffer as pension plans become defensive, and money is withdrawn and more sensibly spent at the bar. Of course, there are indicators that deal with consumer sentiment, but they are statistics (remember, we've learned that no one is to be trusted).
So what is the conclusion? Well, the MS and LIE relationship clearly shows us the power of the basic market components, fear and greed. The inflationistas were wrong simply because people were afraid and stopped spending and gambling (the economic theory caveats played second fiddle). No doubt, experts, especially economists and media pundits, will turn away from this Occam's Razor inspired explanation and come up with more complex stories, or seek to incorporate this fear into some complex economic theory, but there really is no need for complexity when there's a perfectly good common sense explanation.
And, by the way, irreconcilable differences do lead to divorce. When inertia ceases to define the trend we'll move in a new direction, and the LIE will cease to be and MS will misbehave. Now, let's do some research and attempt to predict a change in direction.
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