In additionto underminingconfidence incurrencies, a sudden jump in inflationcouldfrighten the market by eroding the value ofinvestments, such asbonds, that payfixedinterest rates.
To turn to a specific, currently relevant example, if fixed-interest bonds are bad, but equity investments are acceptable, then what if an investor buys a non-voting equity instrument whose return is based on profit shared between him and the venture--with any profit above 6% given to the venture as a "reward"?
That stimulus, mostly in the form of fixed asset investments in infrastructure, followed by low interest rates, fueled a hard asset bubble that the Chinese government has been trying to pop since last year.
Although the investments resembled bonds, paying buyers a fixedinterest rate for taking on the default risk of corporate debt, the products invested in synthetic collateralized debt obligations held by Lehman.