Roger_R – I think yoRe: Inflation or No Infl
Roger_R -- I think your observations are right on mark. It is undoubtedly true that you can draw a significant historical correlation between inflation and employment and wage growth. In fact, it is very hard to envision significant inflation in the U.S. without full employment and fat wallets chasing consumer goods. Problem is, as you point out, Bush's 2 million new jobs are at the low end of the scale and the country is awash in cheap China junk. Not enough disposable income in the middle class chasing too many goods. I think we will be getting a gradual cost push from rising materials and interest costs over some extended period. But in view of your scenario, companies are going to have to eat those costs in the absence of a lot more exports. But why should foreigners buy American junk when China and other emerging economies can produce the same junk cheaper? Corp profits are going to moderate as a consequence. These are the deflationary forces which Bill Gross talks about.
Some people are describing the current economic environment as a Goldilocks Economy. Not too hot and not too cold. Relatively low unemployment, GDP expanding at a real 3% to 4% rate and a nominal 6%, low interest rates, low inflation, profit and dividend growth in double digits. See Lawrence Kudlow --Barreling into 2005. OTOH some people might view the same set of data as indicative of a middling, to piddling, to squishy, to WEAK and VULNERABLE economic performance, especially from a working man's perspective. So there may be a blind spot growing in the national data that does not reflect a widening gap between corporate economic health (nominal balance sheets and income statements) and Main Street Mr. and Mrs. America's economic health. (nominal balance sheets and income statements)
So you come to the other side of the deflationary/inflationary tightrope that Bill Gross keeps talking about and that is the role of the central bankers, particularly the Fed. You'd have to conclude that the Fed is mighty leery of the sustainability of this Goldilocks Economy. If the economy is in such fine fundamental shape, good and getting better as Kudlow maintains, why would the Fed keep the priming pumps working overtime to flood the system with added liquidity and cheap credit? Result is asset bubble pricing in all asset classes now, particularly in real estate. The cheap Fed made dollars have to go somewhere. Not to mention a dollar that if its not in an actual nosedive is surely approaching the diving board. Fed policy apparently is to keep the consumer borrowing and going deeper and deeper in debt to keep the whole shebang from falling off the tracks. Recall that only a short while ago, the Fed was actually publicly ruminating on the dangers of deflationary recession. Well, we have been in a dump the dollars out of the helicopter mode for quite some time now. If the Fed can't see fit to tap the brakes firmly now in a Goldilocks Economy what kind of economy is it going to take. And if they don't, or can't, reverse their current policy path without inducing a deflationary recession, what is the end game for America? Pure and simple, I think the Fed is just playing for time hoping the imbalances in the system work themselves out somehow.
So bottom line: I think you are right for the time being. Low inflation thanks to China, low interest rates thanks to the Fed and its helicopter, low job growth thanks to China, low wage growth thanks to China and Mexico, continued asset price bubbling (including more ghastly increases in real estate prices, probably modestly higher common stock prices, and not as bad a hit in the bond markets as people may fear) thanks to the Fed, skyrocketing personal debt levels thanks to the Fed, and further inevitable declines in the value of the currency thanks to the Fed. In short, a pretty good year in 2005. All in a Goldilocks Economy. So, as you skip along Gross' tightrope in 2005, put one foot in front of the other, keep moving, close your eyes, don't look down, and, think happy thoughts!
Two caveats If the Fed sobers up and takes away the punch bowl as it morally should, or, alternatively, if U.S. consumers finally tell Sir Alan to shove his cheap credit, all bets are off. But I don't think there is much chance of that, do you?
