Inflation is coming
After a brief respite, aggressive intervention by global central banks threatens a 2011-style surge of higher prices.
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.
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Agreed that inflation is coming, and no it's not "already here". We've been getting sort of typical average / slightly higher, than average inflation, mostly due to food and energy prices.
The real inflation will happen when banks start lending again, and all the cheap money from QE1 through QE(x?) begins to surge into the economy. This will cause an initial, but brief, boom period, followed by aggressive action by the feds to move towards high interest rates. (especially if Ben is no longer chairman.) Rates need to come UP a little before banks start lending.
There will come a time when we see a mass exodus from equities, probably in the magnitude of 30-50% drop. Won't happen this year, or probably next year, but it IS coming. Watch for rates to rise upwards around 5-6%. (we're a ways off from that yet)
BTW, if you think some old book proves that stocks will drop to near zero before the end of the year, and that it will be just like France during the French Revolution, you are an idiot. (that means you, VL)
One of the few benefits of a slow economy and quantitative easing is that the federal government has been able to borrow money dirt cheap, keeping interest on the debt from causing much bigger fiscal problems. Look for that to end when the economy heats up. The Treasury Dept. should convert its short-term debt into long-term debt to lock in these near zero rates before it's too late.
It seems there may be some confusion, or is it me? This article speaks of both price inflation and the inflation of the money supply which weakens the dollar. Both are painful but price inflation, as shown in his example is not necessarily caused by a larger supply of money. This is usually triggered by classic supply and demand dyanmics, and the never ending quest by producers to hold profit margins. The larger money supply will probably lead to yet another bubble popping. The US dollar.
Obama is a commie
he is reducing our nuclear weapons to zero.
he has told the army not to even try to do alternative fuels.
he is now about to drain all the fuel out of our US reserves to insure when the arabs rebell and quit selling us fuel there will be none in the US.
this goes along with his not letting anyone drill for new oil.
pretty much the US is now a has been country.
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.
We should not be thrilled over growth or scared of inflation. Actually this planet absolutely cannot handle growth in population, building, and economics like it has been going over the last 50 years. For this planet to be healthy 1000+ years from now, we need to target ZERO growth. If everything we measure was at 0%, everyone would panic...but that is exactly what is needed to sustain our planet long-term.
Obama wants to tap into the US reserves to lower the price of gas, so the Dumbocrats will think now that gas prices are lower...life 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.
We already have inflation! Who in their right mind excludes two major sectors of the economy in the calculation of "inflation"?
The fed's job is to stabilize the banking industry. They are recapitalizing the banks as they modify loans and sell off foreclosed properties and have to book to value their portfolios. The real estate loss in valuation was in the trillions and is being held as "toxic" debt which is slowing being realized onto their statement of assets.
Ever since 2009, I have paid more for less...so what is the big news here?
The middle class is shrinking and so is our spending...not a good mix!!!
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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