Which 'flation' lies ahead?

[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:

Quote:

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]

Quote:

Originally Posted by CCdaCE 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]

Quote:

Originally Posted by CCdaCE 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]

Quote:

Originally Posted by haha 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]

Quote:

Originally Posted by Nords 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]

Quote:

Originally Posted by deserat +1 on stagflation - and worse than the Carter years....

Quote:

Originally Posted by haha 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]

Quote:

Originally Posted by Gone4Good 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]

Quote:

Originally Posted by M Paquette 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]

Quote:

Originally Posted by Gone4Good 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.

[haha]

Quote:

Originally Posted by Gone4Good 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.

I am sure you realize this, but thinking that long term treasuries do not present an attractive opportunity does not imply that the inverse trade does either.

Sometimes the only reasonable thing to do is to stand by.

The only long term high probablity but low risk position that I can think of now is natural gas. My preferred vehicle is a large natural gas oriented company with abundant low cost reserves and quality finances.

You can't get too badly hurt falling out of a basement window. Once you have that covered, good things can happen essentially for free.

Ha

[Gone4Good]

Quote:

Originally Posted by clifp 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.

The cleanest way is to open a futures account and sell the relevant treasury contract. You can also buy treasury puts or short a Bond ETF (no need to buy an expensive leveraged short ETF).

[Gone4Good]

Quote:

Originally Posted by haha I am sure you realize this, but thinking that long term treasuries do not present an attractive opportunity does not imply that the inverse trade does either. Sometimes the only reasonable thing to do is to stand by.

I do realize this, and have said as much.

Agree on Nat Gas, btw.

[M Paquette]

Quote:

Originally Posted by Gone4Good Is it really more rational to worry about inflation today?

I'll be durned if I'm gonna go short Treasuries against long TIPS and pay margin while waiting for superduperhyperinflation to show up.

Besides, I don't think we'll see sustained inflation or the Inflationary Spiral of Doom as long as wages for The Rest of Us remain flat. If prices on something go up, and we can't pay, we'll switch to something else if possible (e.g., not heating oil or gasoline).

[clifp]

Quote:

Originally Posted by Gone4Good The cleanest way is to open a futures account and sell the relevant treasury contract.

Of course this exposes one to issues like contango which means that even if you guess the right direction, you could lose money if the timing or the expenses are too high.

Ideally what I'd like to short a 10 year T-bill pay my 2.4%/year interest and then sometime in the next 10 years buy it back at profit (hopefully). But I haven't found anybody willing to take the other end of this trade. As HaHa says the inverse trade aren't always great either.

[Gone4Good]

Quote:

Originally Posted by M Paquette Besides, I don't think we'll see sustained inflation or the Inflationary Spiral of Doom as long as wages for The Rest of Us remain flat. If prices on something go up, and we can't pay, we'll switch to something else if possible (e.g., not heating oil or gasoline).

Hey look, we agree!

BTW, even if we can't find a substitute for something like heating oil, if the price goes up and we don't have any more cash in our pockets because wages are flat, we'll have to cut back on something else. That 'something else' should fall in price i.e. no inflation (even if folks in the blogosphere run around claiming hyperinflation because the price of heating oil is up).

[Chuckanut]

Hmmm.. Yes, the feds are spending worse than drunken sailors, but the states and local governments are cutting back spending big time. And the consumer is keeping spending on a leash while he/she pays of debt. So maybe the more conservative governments and the consumers are countering the Feds inflationary policies

[TromboneAl]

Quote:

Originally Posted by Sandhog 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.

Can you explain what you mean about "planned" retirees? Thanks.

[GregLee]

Quote:

Originally Posted by TromboneAl Can you explain what you mean about "planned" retirees?

Retirees who have planned ahead to meet the possibility of inflation, I think is meant.

[jdw_fire]

Quote:

Originally Posted by Gone4Good Meanwhile the bond market is currently forecasting inflation of . . . 5-YR 1.72% 10-YR 2.06% 30-YR 2.46%

are you saying you think the bond market is correctly forcasting inflation here? i suppose you also believe and can show that the bond market in late 2010 correctly forcasted the 2.99% (double that to 5.98% if want an annualized number) inflation that occured in the 1st 6 months of 2011.