Which 'flation' lies ahead?

[calmloki]

Bicurious inflation is an increase in the cost of sex toys.

Thought that was trycurious.

 

[MichaelB]

Biflation describes the current malaise. Everything that you need to buy is going up. Everything you own is going down. yet the net CPI rate is modest.

Bicurious inflation is an increase in the cost of sex toys.

An increase in the cost of toys combined with a decrease in the performance of the assets?

 

[Alan]

Bicurious inflation is an increase in the cost of sex toys.

Thought that was trycurious.

An increase in the cost of toys combined with a decrease in the performance of the assets?

 

[Independent]

My take on this is no one really has a clue what lies ahead for our economy but a lot of people are convinced it will be extreme.

I agree with this. The Fed certainly wants to avoid both deflation and inflation, and they are trying to follow the middle course of just a little deflation.

But, we're clearly in an economic situation that's different from anything else we've seen since WWII. Economists can look at other countries' experiences, but nobody else is exactly like the US. So they're all working with very limited knowledge. This increases the chances of falling off on one side or the other.

For the present, it appears the side that said "it's easy to avoid inflation during a recession/depression" were right.

 

[Brett_Cameron]

My belief is that the banking system cannot function long term in a deflationary economy. A little inflation makes things work. I imagine that the Treasury will "print" more money to deliberately cause inflation or prevent deflation if/when it comes to that. Some of their actions in the recent past have had the same effect: devalue the dollar. JMHO

 

[obgyn65]

I agree something "extreme" will happen. My bet is on a major depreciation of the $ (in the 20-30% range, possibly more) rather than on any type of 'flation.

My admittedly biased observations:

My take on this is no one really has a clue what lies ahead for our economy but a lot of people are convinced it will be extreme.

 

[braumeister]

FWIW, I am one who has some experience with hyperinflation.
When I lived in Brazil in the 1980s, we had it in earnest. Every few months they would lop another three zeros off the currency and change its name (think "ten thousand dollars are now one thousand dullards". The smallest bill in my wallet was often a 50,000 and I would need at least several of them just to pay for a taxi ride.

But people dealt with it. The financial system coped. It was unpleasant, but it was manageable.

Hyperinflation in Brazil was difficult, but at the same time I saw what I thought of as ultrahyperinflation in Peru. It was so bad there that many people were paid hourly so they could run to the store and buy something (yes, I'm serious). Images of Weimar Germany were everywhere.

Still, the Peruvians coped.

I'm quite certain that we will see renewed inflation in the USA, although I hope it won't be as bad as we had it in the 1970s. Inflation is the retiree's worst nightmare, even though the rest of society is able to deal with it. Inflation is the one thing I dread more than anything else.

 

[braumeister]

And lest anyone doubt that inflation is coming back, notice that after a couple of down years, it's most definitely rearing its ugly head again:

MOAA: COLA Watch

 

[Gone4Good]

And lest anyone doubt that inflation is coming back, notice that after a couple of down years, it's most definitely rearing its ugly head again:

Meanwhile the bond market is currently forecasting inflation of . . .

5-YR 1.72%
10-YR 2.06%
30-YR 2.46%

 

[haha]

Meanwhile the bond market is currently forecasting inflation of . . .

5-YR 1.72%
10-YR 2.06%
30-YR 2.46%

And it is sure to be right, just like it was in the early 80s when it forecasted inflation of 14-16%. Be sure to go all in! It's a once in a generation opportunity!

Ha

 

[Mulligan]

Meanwhile the bond market is currently forecasting inflation of . . .

5-YR 1.72%
10-YR 2.06%
30-YR 2.46%

I'm afraid the bond market isn't forecasting anything and unsophisticated investors reaching out on the far end are going to get whacked. I've read that the 10 year bond should be over 6% in a "normal environment" relative to current inflation rates. I definitely feel for retirees who are seeking safe and reasonable returns in the interest rate market.

 

[Gone4Good]

And it is sure to be right, just like it was in the early 80s when it forecasted inflation of 14-16%. Be sure to go all in! It's a once in a generation opportunity!

Ha

Just a data point.

 

[Gone4Good]

I'm afraid the bond market isn't forecasting anything and unsophisticated investors reaching out on the far end are going to get whacked.

That's what they keep saying. Unfortunately it keeps not coming to pass.

 

[Mulligan]

That's what they keep saying. Unfortunately it keeps not coming to pass.

That is why I'm thankful I have a pension as I would be a horrible investor! I know there are tax implications, but why would anyone buy a 10 year bond and it's risk when you can get a 5 year CD at that rate or slightly higher? I guess the 10 year could go to 1% and you would get a nice capital gain!

 

[Gone4Good]

why would anyone buy a 10 year bond and it's risk when you can get a 5 year CD at that rate or slightly higher?

I personally wouldn't. Neither would I own a bond fund holding the same.

But for folks or institutions needing to find a place for a couple million bucks or more, retail CDs aren't really an option.

 

[CCdaCE]

Didn't the fed just quit buying bonds with freshly printed money? How does that NOT cause inflation? Damn circular ponzi scheme if I've ever seen one.

Old article, seems to still make sense to me. Tell me why it's wrong? Another older article. Inflationary - I don't understand how it can be viewed any other way. Is it too little printing to make any difference?

From the second link:

Simons admits that inflation will not be a problem as long as the United States remains mired in a recession. "When the real problem starts is once the economy starts to revive. That's when the banking system ... will start to expand the money supply. History shows, it's very, very hard for the central bank to raise interest rates rapidly enough to offset the increase in credit. That's when we are going to get the inflation," he says.
Some say the Fed's bold moves could bring the country out of recession, without sparking a terrible bout of inflation, if it manages to take away the proverbial punch bowl at the perfect time.

I guess they're printing one asset, to buy another. So, it's not changing the supply?

-CC

 

[M Paquette]

I guess they're printing one asset, to buy another. So, it's not changing the supply?

-CC

It changed the supply of money, but it did not significantly change the velocity of money. That is, it didn't cause all that money to pour into new economic activity. (This is why Fed policy is sometimes compared to pushing on a string...)

Fluctuations in price of goods without a corresponding change in funds available to spend on them means that inflation can't really be sustained outside of what we see in goods where demand isn't flexible with respect to price. I wouldn't worry about inflation until we see rising wages, something most of the population hasn't seen in the past decade.

 

[Gone4Good]

Didn't the fed just quit buying bonds with freshly printed money? How does that NOT cause inflation?

When the Fed wants to lower the overnight lending rate (or Fed Funds Rate) from 5% to 4.75% it goes into the market and buys enough T-Bills to drive the rate to the desired level. These "Open Market Operations" are common practice and not at all controversial. "Buying bonds with printed money" is standard operating procedure for the Fed.

Now, assume for a moment that the Fed Funds rate was currently 5% instead of ~0%, we had an unemployment rate of 9.1% and rising, GPD growth of 1.3%, and 5-yr inflation expectations of 1.7%. Said another way, assume all of today's economic indicators but a Fed Funds rate of 5%.

Given that back-drop, is there anyone who would argue the Fed shouldn't engage in Open Market Operations to lower interest rates? People would be shocked, and financial markets would tank, if the Fed wasn't lowering rates.

Seen that way, the critics can't really claim that the Fed is acting in a way that it shouldn't given the economic conditions. All they're really saying is that they have a 'feeling' that 0% is too low of a rate. But why? If we'd have no problem cutting 5% rates given the current economic environment we shouldn't have a problem with cutting rates, period. The truth is, the economy is telling you rates are too high . . . even at 0%.

Its worth noting too that the Fed critics have been consistently wrong for almost three years now. Even with 0% rates the economy continues to struggle and long rates and inflation expectations continue to drop. Imagine what the world would look like if the Fed listened to the critics in 2009. Why should they listen today?

 

[Sandhog]

And it is sure to be right, just like it was in the early 80s when it forecasted inflation of 14-16%. Be sure to go all in! It's a once in a generation opportunity!

Ha

I see some similar pattens as it were back in late 70s and early 80s. Jimmy got the bad wraps for economy downturn while Ronald benefited from high inflation. Only reason we don't have gas rationing is due to technologies that we didn't have back them. I see high inflation coming but not until after 2012 election. What Fed said is true about not raising interest rate until early 2013. No matter who becomes the President, they be raising interest rate like back in the day when I would get 11% on 5 year CD and get a free toaster and coffee maker for deposit over $10K.

As someone already mention, inflation is #1 killer of retirees. However, it those retirees are planned retirees, they'll weather through the storm that's brewing after 2012 election.

 

[Chuckanut]

No doubt about it, the long term rates on CD's and Treasury bills are out to lunch, and enjoying three martinis with the lunch! Wether a CD, T-Bill, or bond fund, I would keep the maturity, or average maturity, under 5 years. Now this comes from a person who never believed we have interest rates this low for this long. So what do I know?

 

[deserat]

I wonder what a member of a rationale group does-- practice being rational or just practice rationalizing? Or is it some logic version of a chorale group?


I predict stagflation: 0% change in prices. Plus or minus 3%...

+1 on stagflation - and worse than the Carter years....

 

[Gone4Good]

+1 on stagflation - and worse than the Carter years....

And it is sure to be right, just like it was in the early 80s when it forecasted inflation of 14-16%. Be sure to go all in! It's a once in a generation opportunity!

Ha

Ha's comments work both ways.

Everyone who's convinced that we're in for soaring inflation can very easily short some 30-yr Treasuries and use the proceeds to buy TIPS.

Should be a slam-dunk money maker when inflation hits double digits. "Be sure to go all in! It's a once in a generation opportunity!" someone once said.

 

[M Paquette]

Ha's comments work both ways.

Everyone who's convinced that we're in for soaring inflation can very easily short some 30-yr Treasuries and use the proceeds to buy TIPS.

Should be a slam-dunk money maker when inflation hits double digits. "Be sure to go all in! It's a once in a generation opportunity!" someone once said.

Somehow I suspect that Mr. Market can remain 'irrational' longer than I can remain solvent...

 

[Gone4Good]

Somehow I suspect that Mr. Market can remain 'irrational' longer than I can remain solvent...

I wonder how irrational the treasury market is.

Is it irrational to bid up treasury prices when soveriegn default of some Euro members seems increasingly likely, when credit stress is spreading from the European periphery to the core, when U.S. economic growth expectations are downgraded, when bank credit spreads are blowing out, when stresses in the inter-bank lending markets are re-emerging all at a time when global fiscal policy is becoming contractionary and central banks are on the sidelines.

Is it really more rational to worry about inflation today?

 

[clifp]

Ha's comments work both ways.

Everyone who's convinced that we're in for soaring inflation can very easily short some 30-yr Treasuries and use the proceeds to buy TIPS.

Should be a slam-dunk money maker when inflation hits double digits. "Be sure to go all in! It's a once in a generation opportunity!" someone once said.

How does one easily short 30 year Treasuries? I know how to buy treasuries, but I get an error message from Schwab when I try to sell them short. I know there are short T bond ETFs but these have significant expenses associated with them.