Inflation is coming

After a brief respite, aggressive intervention by global central banks threatens a 2011-style surge of higher prices.

By Anthony Mirhaydari Sep 19, 2012 3:31PM

Image: Inflation ( Nick Koudis/Getty Images)Stocks resumed their upward march Wednesday thanks to a surprise announcement that the Bank of Japan that is expanding its asset purchase program modestly -- in a bid to stimulus faster growth -- by $128 billion to just over $1 trillion. The Bank of England is also moving closer to deploying more stimulus as well.


All of this comes in the context of aggressive new action by central banks around the world to bolster stalled global economy. Last week, the Federal Reserve announced an open-ended commitment to purchase $40 billion a month in mortgages until the job market improves. The week before, the European Central Bank announced an open-ended commitment to cut the borrowing costs of eurozone bailout recipients.


The flood of cheap money will have consequences. Not now, as stocks and precious metals launch higher, housing recovers further, and the sugar rush encourages new consumer spending. But later, as the influence of negative, inflation-adjusted interest rates results in a repeat of the 1970s "stagflation" nightmare. Here's why.


The powers that be understand this. And that's why there have been constant whisperings, rumors, and backroom chatter that the Obama Administration is considering a release of crude oil from the Strategic Petroleum Reserve. That, along with a larger-than-expected building of oil inventories and a strange oil price collapse on Friday, will keep near-term pressure on inflation measures. At least through Election Day.


Maybe that's all that matters. Or maybe there are legitimate supply side concerns given the tensions in the Middle East.


But like the laws of nature, the laws of economics cannot be argued with. An extended 1970s-style period of negative inflation-adjusted interest rates -- at a time, like now, of relative economic stability -- risks big time increases in prices later.


These were the warnings of Fed historian and Carnegie Mellon professor Allan Meltzer, author of the multi-volume "A History of the Federal Reserve," in a call Wednesday morning. He has studied the mistakes that led to the "Great Inflation" of the 1970s, and is worried the Fed is making the same mistake now.



For one, Fed officials are much more focused on unemployement than inflation. The preoccupation is with the 8.1% jobless rate rather than on the fact producer prices rose 1.7% in August, the highest monthly rate in three years and a pace not seen since the very early stages of the recovery.


Inflationary pressures are being dismissed as temporary. But what if they're not? And besides, even temporary inflation surges can be extremely damaging. Remember the 2008 commodity price spike?


Second, Meltzer believes policymakers are focused on the wrong problem. We don't have issues -- debt/deficit problems, long-term unemployment, stagnant middle-class wages, out-of-control health care costs -- that can be solved with more cheap money. We have enough of that already, as witnessed by the $1.5 trillion in excess reserves sitting in bank vaults. If the big banks want to issue more loans, they would've done it already.


The problems need to be solved by Washington. Clarification on these issues would then solve the problem of CEO uncertainty, which is weighing on capital investment and hiring (the subject of my recent column). Uncertainty about tax rates. Uncertainty about health care costs. Uncertainty about the deficit.


Third, by encouraging people to take more risks by reducing the interest rate on "safe" assets like Treasury bonds, the Fed is setting savers up for dramatic losses if they lose control of the situation. That's because they have explicitly said one of their policy goals is to move people into assets like stocks and housing.


I don't know about you, but this is the kind of macroeconomic meddling that is more at home in Beijing or Moscow than in the land of the free.


Meltzer's advice to investors: Ride the wave higher and watch for inflation.


That's exactly what I've been recommending to my newsletter subscribers and readers for months. As I said in a recent video spot, the moves in silver and gold have become extended. Examples include the VelocityShares 3x Silver (USLV), which is up nearly 100% since I added it to my Edge Letter Sample Portfolio in late July.



If you're not in these areas already, consider new areas of strength. These include large-cap stocks with emerging market exposure like Caterpillar (CAT) and Yum! Brands (YUM). I am adding YUM to my sample portfolio.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


Sep 19, 2012 4:55PM

Ever since 2009, I have paid more for what is the big news here?

The middle class is shrinking and so is our spending...not a good mix!!!

Sep 19, 2012 4:25PM

Not exactly on board with your comments, & the same goes for the FEDS QE3 move that they just made either, but inflation has been a nightmare here in TEXAS on everything all year long! FOOD & GAS prices are just going crazy here regarless of what the media says about it! A whole lot of gouging going on down here in TEXAS & this to makes things a lot worse than it should be for everyone of us! It's not about making an honest dollar anymore, it's about who can I screw out of their life savings, & rip them off today, for eveything I can get out of them! Time to wake up folks, because nothing has changed from  the same ole BS tactics as 2008 & before, other than it being worse off than before!


Sep 19, 2012 9:34PM
I have been in The States  since 1982 . All these while here , i have been living my life comfortably  no matter who the president is .  my kids go to college and graduate and have good jobs now . We work hard and make good money and enjoy life very much . The notion that this president can create jobs and that president can't create jobs  is just plane illusion .  You have to study hard , work hard , use your brain to make your life better . Not hoping that the president can hand you a job . Get it ?  

Banks that are required to have this money available (given to them by the Fed through QE1 - QE3) are keeping the money. 


They also get paid interest on that money by the Fed..  That is the main reason they do not loan it out.   It is free to them without the hassle of having to make people pay them back.   Why would they loan it?  


This Fed and this administration's regulations are destroying this country and we can do nothing about it ... other than VOTE in November to rid ourselves of the Crackpot Do Nothings in the White House.

Sep 19, 2012 5:02PM
We all knew this was coming. How could any sane person believe obama deserves four more years? My gosh.
Sep 19, 2012 4:40PM
There's no mention of trade deficits in your story.    Banks can make loans here but the money just zooms  to over seas markets for oil and Chinese imported goods and products.    The money never goes into the US economy thus no jobs here.
Sep 19, 2012 4:49PM
Well, NO DUH, Anthony! Devaluating currency does that. We MUST get rid of the Fed! They always seem to be at the core of this country's economic problems.
Sep 19, 2012 6:52PM
   I see this issue as just a dot on the horizon barely in view in the grand scheme of things. Our government spends money like there's no tomorrow. Everytime I look at the staggering national debt and lack of a balanced budget, it makes me cringe. At some point the economy will collapse and who's going to bail us out then. The federal government appears to only have one answer for any problem: throw large piles of tax dollars at it and see if that helps. All the money you've managed to save over the course of your life will be worthless. The worst is yet to come. All these politicians need to apologize to our children that are having their futures crushed. Until money is removed from politics nothing will change!   
Sep 19, 2012 5:49PM

Obama wants to tap into the US reserves to lower the price of gas, so the Dumbocrats will think now that gas prices are is good again. It is an illusion purely for election day...he's only good at smoke and mirrors but his party continually drinks his Kool-aid!


Romney states the hard true facts of our economic despair....Obama will sugar-coats everything until election day.


We need leadership not rhetoric - Obama's improvement in 4 years = zero. 

Sep 19, 2012 4:33PM
The oil release would not have any effect on world oil prices.    It's just to small against the printing press and to slow to make any dent in global prices.
Sep 19, 2012 8:34PM

I remember an interview that was with Nancy Pelosi a few years back. She was asked about the escalation of debt and she replied, paraphase here: Don't worry, we'll just inflate the economy.

Well, Enjoy it.

Sep 19, 2012 6:35PM
You folks need to aim at the correct target. The New World Order is the economic game plan.  The goal is to move  production by the International Corporations across all borders.  In order to accomplish this real wages in the US will need to be as real as compared to Chinas., Koreas, and Mexicos.  If you google wages in these countries you will see how much the Gubermental commitment  to this Order needs to lower real wages here.  If our hourly wage is $10 per hour and Chinas' is $2.50 then we need either 400% inflation or a combination of inflation there deflation here but you get the point. The United States Congress Senate and the POTUS are all in this fix together.  That is precisely why what they want to happen is happening. Our government that we thought we had representing us is a thing of the past.  Our representatives maybe 15 years ago made this committment and all hands are present. So to them massive inflation is part of this process. So it matters not who is President as whomever is will definitley fall in line. The outcasts to this plan are the Tea Partiers.  Liberals demonize them without understanding they will not cooperate and the pressure to keep them out of the system is huge.  We will very soon resemble Cuba.  Hold on to that 92 Chevy. Some still can't appreciate this is happening and that is understandable.  I am 100% confident that what I say is true.  There will be no housing recovery.  There will be no improvement in the jobs picture and I assume shortly we will see a new Currency.  This will be the ultimate weapon used to take from those most successful.
Sep 19, 2012 5:48PM

We already have inflation!  Who in their right mind excludes two major sectors of the economy in the calculation of "inflation"?

Sep 19, 2012 5:57PM
A little late, Anthony. the key here was to not waste your time frothing over stock gains caused by a deflating dollar and fortify the likely spikes you can't live without. Hoarders and Preppers might be cornering the food products and enjoying Wal-Mart goods o'plenty, but history suggests there is a direct relation to inflated prices and availability. What good is being a 30-year old millionaire if you can't buy fresh socks or underwear?

How does a great nation of America get brought down? It fires it's own workforce and destroys the infrastructure to rely solely on imports. It convinces the masses to be reliant on handheld devices with apps, eliminating the premise for self-sufficiency. It forces them to use credit that eventually ties up every incoming dollar. It gets them hooked on junk and fast food. Inflation doesn't just raise prices, it retards supply until the cost to import exceeds the nation's ability to purchase. we can't just turn-coat and conjure up our old infrastructure any longer. It's been sold off.

Good article, but the need to-- Close the banks, end the Federal Reserve, get rid of Wall Street and concentrate 100% on JOB RECOVERY is absolutely critical now. We can only stop what Ben has started by a full-out restoration of revenues, incomes and broad purchase revival.

Sep 19, 2012 5:25PM
QE3 - printing money - is a deliberate act by the federal reserve to destroy the USA dollar. Why? who gains here?? Printing money dose not increase employment, it create inflation and destroys consumer buying power. The federal reserve board has got to know this, so why are they printing more money? QE3 is so blatantly inflationary that only someone with an agenda to destroy America would do it.
Sep 19, 2012 8:02PM

and Obama's great free big govt death healthcare is gonna cost 6 million

middle class families 1,200 to 1,700 in penalties [TAX] when and if it's

not stopped! yet he said on his loverboy big 1% liberal Letterman that

he's for the middle class! that bill can go with the higher

energy prices, food, clothes etc....that because of his socialist big govt

welfare foodstamping freebie agenda is costing all the hard working middle class

cause the lower class gets all their Obama money so they ain't paying for IT!!!!

you few that are on his chain now better break off and let the other democrat

liberal roaches sit by and fight over the Obama crumbs and hope Romney can

do enough to let business create some JOBS!!! and give you back your FREEDOM!

Sep 19, 2012 4:30PM
Jeez,  I sure hope we don't end up with hyper-inflation with one billion dollar notes as in Zimbabwe (formerly Rhodesia) years ago or in Weimar Germany, early 20's, when there were Berlin newspaper ads, "Wanted:  auditors and bookkeepers who are good with zeros...." 
Sep 19, 2012 8:31PM
after we went from under a trillion in debt in 1980 to near 12 trillion by 2008,,,,,it became very obvious this was far past the point where the government could ever pay it off------that leaves only one way for the government to solve the debt problem-thru inflation,and if  it will not raise its ugly head by itself-the government will do it for us to settle this
Sep 20, 2012 5:14AM
I just don't know why Americans cannot see what is happening to our country under the Obama administration??? Makes me believe Romney was spot on with what he said on the recording. Some people just want bigger government to take care of them??? NOT ME......Go Romney....smaller, less GOVERNMENT!!
Sep 19, 2012 8:27PM
The big push for globalization got rolling when NAFTA was ratified. The inflation has been snowballing for some time now. Except I think this time it will be larger. The scary part of it to me is that the fixed income folk, the free riders, and sadly even the SS folks are going to demand increases to keep from being cut. Driving our budget #'s higher and higher. It probably will not keep pace with incomes. It's a slow motion train wreck and we all get to watch no matter who the President is.
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