Beating the coming inflation

Down the road is once the recovery hits, I'm not going to pretend I know exactly when is that, reputable private forecasts are saying mid 2010. So 2011 seems like when inflation will pick up. By high I mean outside the fed's range and the markets expectation which is good enough to make money on. The exact number for the core CPI I dont know

 

The Fed's CPI target is 2.0% - I wouldn't call a 2.5 or 3.0% CPI in 2011 "high" -- at least not in the sense of the hyperinflation bulls, especially if we come out of a trough.

And even then, single years have little impact on long term annualized price increases. Japan had years with 2-3% inflation and yet their rolling annualized 10 year inflation numbers were around -1 to 0%.

 

How will we know? We had 6-8% inflation for a decade (maybe two), all the while the Fed and Gummint was telling us, "inflation is only 1-2%.. don't worry, be happy"

 

The Japanese experience I take as evidence there will be inflation, if their two huge bubbles bursted and they prevented -10% 30's like deflation a better central bank shouldn't have much difficulty getting these numbers positive.

My other point is that monetary policy will have to stay loose(probably too loose) for years as not to kill any recovery, this should create a stagflationary enviroment and it will be quite hard to pull the genie back at the bottle. If the commodities bull returns then it will be even harder as velocity soars with inflation expectations jumping and the fed not having the courage to pull a volcker so early after the worst recession since the 30's

 

Thanks, Scribby, nice table! I see the US is way down in the list. Ouch. At least we edged out the EU, and we positively killed Burundi! Germany's ranking all the more amazing, number 1 in total (a real surprise to me) and even very far up on per capita basis. Wow! I guess it pays to make good stuff instead of junk.

 

That doesn't make any sense. Japan didn't have any prolonged period of high inflation in 20 years yet you take that as evidence for coming high inflation globally?

 

Of course it makes sense. If the BOJ werent run by morons japan would likely had positive inflation, look at money base and m2 growth after the bubble burst and tell me why would you look at that as a resonable scenario for a US base case. japan doesnt even have an inflation target, there is no effort to try to induce inflation expectations because they are too afraid of looking bad

 

As far as those who say Japanese QE was a 'failure', I hope they are not suggesting that if Japan had paid off its national debt with new money 'it would have no impact', that is just flat out wrong

 

Thinking about credit destruction and money creation as opposite ends of the same issue appeals to me. That’s a really good thought.

However, I agree that there is going to be relatively more inflation in the not too distant future. Maybe “relative” is the key. Let’s say I have $250k in the bank and am adding an extra $50k every year. Now I ask myself: if the government creates an extra 3 trillion in money, how does that affect the value of my money stash? The answer proposed is “possibly not at all, if credit is being destroyed exactly as fast as the govt creates and injects new $’s.”

My counter-thought to that is to consider the other alternative in a vacuum: credit contacts/is destroyed, and the govt DOESN”T create 3 trillion more dollars. Is my wealth (all in USD) now relatively less diluted? I think the answer has to be yes. If the supply of something I own decreases, it becomes relatively more valuable. Especially in terms of other currencies that are maybe not printing as fast.

I see and like the evidence pointing to short term deflationary pressure: the excess capacity, the renewed enthusiasm for saving and de-leveraging, etc., etc. Still, making more (out of nothing) of the thing that I store my wealth in dilutes it relative to the scenario where none more is created. If there’s excess production capacity around the world, but the US prints dollars as fast as it can, we’re just fooling ourselves. Just because there are suddenly more (created and borrowed) dollars available to put that foreign excess capacity to work doesn’t mean that our economy is worth more. For the people that have carefully hoarded dollars it is a real loss.

Even if the plan is to withdraw the excess money from the economy as credit and money velocity pick up again, think withdrawing the increased liquidity will be near impossible. Just as home prices (mostly monthly-payment driven) recover, the fed would have to raise interest rates, crashing the housing prices back down. Adjustable rate mortgages re-setting over the next several years already create a hazard in a record low interest rate environment. In a high interest rate environment (necessary to sop up all the excess liquidity currently being injected) these ARM re-sets would be catastrophic and politically impossible. All the debt-financed social programs being initiated by our current fearless leaders will be very difficult to abandon in the face of the entitlement paradigm of the average Joe voter (or should I say Jose voter). USD will continue to be created out of thin air to fund them. I firmly believe that (usually modest) inflation is a “transfer program” all it’s own, where the government erodes the wealth of the “havers” by creating money and benefitting the “don’t havers” or “already spent it –ers.”

I’m not sure how many different ways I can say it. If we store our wealth in something that a party with an intense desire to spend it (and some might say with a mandate to spread around “fairly”) can create out of thin air, those of us who have accumulated wealth will see it become diluted. At least relatively.

I wish I could think of some alternate store of wealth that can’t be created at will, confiscated expediently, or hasn’t been bid up way beyond it’s relative value. However, I cannot.

 

We are very much on the same wavelength Texrex, you have nicely summarized the present situation. We point more and more to future obligations via entitlements and the difficulties they create for the US economy. These entitlements wouldn't have necessarily had to lead to such a problem, but in practice they do, and did. The Soc. Sec. system would take only minor tweaking to put it on a sound footing from an actuarial standpoint, and in that regards, it is a good and efficient program to protect the lower wage earner in their waning years. The problem, as we all know, is that over the years the government has borrowed from the trust fund at artificially low rates and then spent the money in relatively non-productive ways, and now has only very painful ways of paying the fund back the money it is owed.What is needed, of course, is fiscal discipline, but that requires political will apparently beyond our politicians capablities.

In the end, if it wants to survive economically, i believe the US will have no choice but to move in pollitically unpopular directions. This might take the form of, for example, cuts in military expenditures and in the subsidy of a fiscally out of control medicare program.

The best way out of this mess that i see, and there is no good way, would be to cut military expenditures to fall in line with per capita expenditures of other developed countries, which would require cuts of about 5% a year over a period of about 13 years, and couple this with a deregulating and opening up of medicine to free competition, so that the medical cartel is broken and prices fall into line with other sectors of the economy.

I have to marvel at the consummate skill with which the defense and medical industries have over the years used the classic fear and safety argument to manipulate the American public, and in so doing to latch on to an ever increasing portion of the taxpayers' money.

Even if political will can mustered, however, the continuously increasing amount of interest that must be paid on borrowed money makes the task of putting the US economy on a firm footing exceedingly difficult. There is going to have to be some serious belt tightening if we are going to pull out of the debt death spiral we have gotten ourselves into. The most likely alternative is a long slow slide via ever increasing inflation into economic oblivion.

I don't see these problems being very soon resolved, thus i expect some fairly steep inflation coming up, probably by 2012, if not sooner. Debt will continue to furnish the incentive for inflation and that will be the path, however disastrous in the long run, of least resistance. Were we still on the gold standard, then i would think those who expect lasting deflation have a sound argument, but we are not, and the the Federal Reserve can write a check, and buy more bonds.