In my previous post, commenter Min clarifies why I think an increasing money supply causes a higher rise in prices of scarce resources relative to other goods.
Hedge funds to me are the main reason for the difference. In both equilibria (prior and post monetary loosening), scarce resources remain constant. Expanding fiat currency makes the scarce resource artificially more expensive, relative to other goods. If you take scarce resources that have a stable demand, oil for instance, because it is a necessary component in many activities, many investors could 'rationally expect' that holders of oil will be able to profitably sell it to the market when they take delivery.
Because hedge funds who are merely looking for arbitrage profit enter into the bidding along with bidders who are actually end users, they make pricing for the scarce resource artificially more expensive. This serves to crowd out the smaller businesses who may not have the economies of scale to be able to earn back what it will cost them to buy the scarce input. Think of it like scalpers crowding out potential concert goers with lower income.
As fiat currency becomes more and more a policy tool, it becomes more and more perilous to conduct regular commercial business activities. But it provides more opportunities for arbitrage, as an expanding currency lifts other investments, such as equities and properties. Funds pile on these risky investments, as they rush out of traditional bonds and savings accounts, whose nominal yields are at zero but whose expected real yields are negative due to the policy’s induced inflation expectations.
It now becomes more profitable and more logical to engage in speculative financial activities as opposed to real economy industrial activities. Now are you still wondering why we are getting more of these rather than more small businesses starting up? Bernanke, be careful what you wish for. You just might get it.