Just Keeping it Real on Inflation Worries
It seems that, the more attention the media gives to the inflation issue, my silence on the subject become more conspicuous as the increasing number of inquiries from worried clients and colleagues would indicate. Since it has been over six months since I broached the subject, I will offer my latest inflation musings here.
Admittedly, the world has changed dramatically in the last six months, but in my estimation, there has been nothing of consequence to change the trajectory of inflation here in the U.S. True, oil prices are spiking and you are probably paying more for a loaf of bread today than you were last July.
We also are seeing a massive amount of fiscal and monetary intervention by the Fed which have, historically, increased inflationary pressures and led to bouts of increasing interest rates to curb its growth. Food riots are breaking out across the globe, and governments are under siege as an indirect result of rapidly increasing commodity prices (which has the effect of lowering the standard of living), all of which is uncomfortable to watch.
While all of this is hard to ignore, and it doesn’t bode well for the world’s economies, the fact is that all of the same reasons why we here in the U.S. have experienced a long period of low inflation, and even some deflation, still exist today.
In my July 2010 newsletter, I made a reference to the “leaky bucket” scenario in which all of the money that the U.S. and other governments are pouring into their economies, which, ordinarily, should have a stimulative effect, is actually leaking out, drawn to the reduction of debt by consumers, companies and governments alike. As a result, the stimulus and easing is not holding And, until the necessary time for this deleveraging to take effect has passed, we aren’t likely to experience any sustained inflationary pressure.
All of this brings me back to my previous column, (On the Contrary, Again, for Long Bonds. Feb 2010), in which I built the case for a possible move back into U.S. Treasuries which will thrive in a low-inflation economy.
I’d like to get your thoughts on this, so keep your emails coming.
