We'll see inflation rise the fastest rate in a decade! Greenie has dropped the ball. I wonder if this is all planned to increase tax revenue and decrease the national debt. Maybe bond yields will finally start to go up. Dumb foreign central banks. They're earning a negative 1% on their money or more.
Your previous post about Asians being dumb for buying US had to take the cake. Go take a course on international finance and learn something central banks and their role. Better yet, read Money Mischief: Episodes in Monetary History and find out whats inflation and whats not inflation. You still follow Gate, Buffet or some crybaby from the Asian crisis has to say about the dollar: Post
What happens if we have a large drop in the price of oil at the same time that the fed hike rates up to 5%? Deflation is still lurking in many sectors of the economy but since we don't have any 120 year old economists at the fed who remember the 1930's it is not considered with the same enthusiasm as inflation. Of course all policy makers remember 21% prime in Canada (17%?? in the states) and will make sure that it does not happen again. Where would prices be if we didn't hit the "tipping point" that caused commodities to rise in price at the same time China started to become the world's workshop? The free movement of capital and labour gives the world an underlying productivity that is deflationary in the long run.
Oh yes, the brilliant Central Bank in Japan with its monetary manipulation. The biggest sheep in the pack. How could I forget! Japan is now much better off thanks to the actions of their central bank... As for inflation. "whats inflation" C'mon, open thoes two eye lids of yours and have a little look around.
This keeps me up at night too. But it seems that the TPTB won't permit that, so expect any sort of silly fiscal policy that is inflationary or increase in money supply to avoid that situation. Bernake's 'helicopter speech' pretty much seals the deal for me. While I haven't really fleshed this idea out fully, my gut feel is that we have narrowly missed depression ][ - the sequelae of the internet bubble popping, the slowdown of 9/11, and the deflationary effects of China and the resultant labor arbitrage scenario that is happening now. The presence of real deflation in the setting of 1% interest rates would have been quite a blow to the economy, and the resulting asset deflation in the equity market would have been carnage. Furthermore, it would have a disaster to our boomer generation who are about to retire, probably forcing many of them to retire in poverty. The resulting banking crisis would probably erase much of the percieved wealth of the US and take us about 5-10 years until we got back on our feet (like the Japanese). That would give China a 5-10 year head start on us, which would really be a disaster. Not a very palatable situation. So instead, RE bubble allows for equity refinancing that allows people to tap home equity lines and spend $$ for a recovery. Economy keeps plugging along, fed raises rates to allow for next round of easing, oil prices rise to create manufactured inflation and a necessary slowdown to catch up with debts. Long term rates rise & equity markets don't crash (too much) which keeps the asset markets going and everyone is happy. Simple no? Except there's that damn conundrum....
From the BLS: CPI year over year 3.6% and the core 2.1%. As Milton Friedman points out in his book, oil is not inflationary but an imbalance in supply and demand. Setting monetary policy because of imbalances such as these is laughable. So the Fed should've raised rates more aggressively last year when food prices saw an increase because of the crop damage from the floods in California? Those food prices came back down after a few months. As for the BoJ and you can throw China in with them too, are their currency controls really hurting them or are they really hurting the US? Check out the manufacturing side of the US and the regions of the country before and after US plants existed. Detroit and Ohio should be good enough examples. Out goes the jobs or crushed from imports, diddly squat in its place.
It's not so simple. What they lose in negative return ( as per your initial post) in US debt purchase, they gain in job growth ( by importing US manufacturing jobs) in their export industries and increased tax revenue from higher corporate profits ( more exports) . Question is how are they hedging, who's buying gold?
In todays LA Times, there's a front page story in the business section about the big CPI jump. When I saw the part about the "core CPI, which strips out volatile food and energy costs", I almost died of laughter. I can't believe in 2005, they are still using this. There's not a single person in America that lives based on the core CPI. Who cares if they're volatile. Everyone needs them!! Maybe the divorce rate is actually lower than it really is. If you strip out those "volatile extramarital affairs", people are really in love! The government should be sued for still using this extremely misleading and dangerous "statistic" (or, "figment of the BLS' imagination).