Tag: Inflation

Things To Come

I realize it is a little early to be predicting the next year and so on….but what the hell I am game….

There has been many that say that the 1st stim plan did not go far enough and that a second one may be needed to get the economy on the right track….and it is written:

The U.S. economy does not need a second fiscal stimulus package, instead the government should cut spending over the next two years, according to a survey of business economists released on Monday.

While economists in the NABE survey acknowledged that the stimulus package had helped to brake the pace of the economy’s decline in the second quarter, only 35 percent viewed fiscal policy as being “about right”.

Half of the respondents saw fiscal policy as too stimulative. About 266 members took part in the poll which was conducted between August 3-18. The U.S. economy contracted at a 1.0 percent annual rate in the second quarter after collapsing 6.4 percent in the first three months of the year.

Okay, many are saying no that the one will be sufficient to get us on the right track…..I say there probably will NOT be a 2nd stim package, not because the economy is doing well but rather the gutlessness of the Dems….they will not have the spine to do another one and still hope to be re-elected.

Now that I have said my piece on the short term how about the long run?  Bloomberg has an article on just this subject:

The Federal Reserve will be unable to prevent the trillions of dollars in government stimulus pumped into the U.S. economy from stoking inflation over the next decade, a survey of business economists showed.

The report is in line with surveys of consumers and indicates the central bank may have to work harder to damp inflation expectations after pouring more than $1 trillion into credit markets in a strategy known as quantitative easing. Economists in the survey also said the Obama administration’s $787 billion stimulus program would push consumer prices higher.

All that maybes, heretowith and sortofs is all legal speak……no one wants to say the word inflation….but I will …..inflation will return and with the deficit as it is today….it will return with a vengeance.

Inflation?  Inflation!  Why inflation?  I know you are asking, is that a gut feeling or something else?  Well to be honest a little of both, but with the expansion of government spending without corresponding tax increases is a disaster waiting to happen….and that disaster could be a rise of inflation.  And the growth of tyhe money supply induced by high amounts of government spending is just another indication, in my book.

And with the way things are looking, wioth the return of inflation and a high degree of unemployment, we are looking at the return of the dreaded “stagflation”.

Inflation, Deflation……Pick One!

The boogey man is in the closet…….many economists are debating whether we will have inflation or deflation……who is right?

CNN Money is reporting that some fear inflation while others fear the opposite.  Which will it be?

Should the Federal Reserve be more worried about the threat of inflation on the long-term horizon, or deflation in the short-term?

Those who fear inflation argue that the recent rise in oil prices, the dollar’s loss of value and the recent rise in yields on U.S. Treasurys are all signs that consumers could soon be grappling with higher prices for lots of goods and services.

These economists say the seeds for inflation have been sown by the Fed’s extraordinary efforts to keep the economy afloat over the past year.

But others argue the economy is still so weak that deflation, or a drop in prices, is the more serious threat. The Consumer Price Index, the government’s key inflation measure, posted its largest 12-month drop since 1950 in May.

This year-over-year decline in prices, coupled with rising unemployment and low factory utilization, could be signs that prices are likely to keep falling. And while lower prices might sound like a positive to consumers with budgets stretched to the breaking point, economists are in general agreement that deflation is far more destructive to the economy than inflation.

Businesses unable to make a profit in an environment of declining prices will likely cut production and lay off more workers. That could cause a deflationary spiral. The Great Depression and Japan’s so-called Lost Decade of economic stagnation are both well-documented examples of the damage that deflation can cause.

When the Fed wraps up its two day policy meeting Wednesday, it is virtually certain that it will leave its key interest rate near zero. What will be watched more closely is whether its statement has language warning of greater risk from rising or falling prices in the future.

In its last statement, the Fed said it “expects that inflation will remain subdued.” It also rang a deflationary warning bell, indicating that “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

I know…I know……so what will it be , Professor?

Back in the “dark ages” of my investing there was a sure sign of approaching inflation, that was the price of gold…if it went up then inflation was expected and investors were trying to get ahead of it.  At last I saw gold was at $900+ per ounce.  Take that for what it is worth.

The Approaching Storm

The federal government will run a near-record deficit of $407 billion this year, according to the latest Capitol Hill estimates.

The Congressional Budget Office released figures yesterday that indicate the red ink will spill over into next year, when the deficit would reach a record $438 billion – and could go even higher as the government takes over mortgage lenders Fannie Mae and Freddie Mac.

The deficit, more than double last year’s sum, is largely attributed to continuing weakness in the economy, high energy and food prices, and the slump in the housing and financial markets, said the nonpartisan agency, which makes economic and budget estimates for Congress.

Such deficits feed inflation, make the nation dependent on foreign lenders, cost taxpayers hundreds of billions of dollars in interest payments on the growing national debt, and drain capital from more productive investments.

The new forecast may restrain the appetite of the next president for adding expensive spending programs or new tax cuts. Pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled at the end of 2010, with Congress also feeling pressure to curb spending growth.

The economy still could slide into a recession.

Bernanke: One Sharp Dude

No crap, Sherlock!

Federal Reserve Chairman Ben Bernanke said Friday the financial crisis that has pounded the country — coupled with higher inflation — is taking a toll on the economy and poses a major challenge to Fed policymakers as they try to restore stability.

“Although we have seen improved functioning in some markets, the financial storm that reached gale force” around this time last year “has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment,” Bernanke said in a speech to a high-profile economics conference here.

While Bernanke welcomed the recent drops in oil and other commodities’ prices, and believes inflation will moderate this year and next, the Fed chief also warned the inflation outlook remains highly uncertain.

The economy is the top concern for voters and of keen interest to presidential contenders Sens. Barack Obama and John McCain, who are gearing up for their party’s conventions. Financial and credit problems are expected to smolder into next year. And, the unemployment rate, which jumped to a four-year high of 5.7 percent in July, is expected to keep rising.

The bulk of Bernanke’s speech dealt with the need to bolster oversight of the nation’s financial system to make it better able in the future to withstand future shocks.

To that end, Bernanke recommended that regulators work on ways to assess the health of the entire financial system, rather than the condition of individual banks, Wall Street investment firms or other financial companies — as is currently the focus.

You gotta love a guy that gets oaid to state the obvious.

Yes, Irene, The Worse Is Yet To Come

Growing evidence suggests American consumers, businesspeople, and political leaders should all be bracing for double-digit inflation, probably as early as 2009.

The relative price stability of the past 15 years is giving way to worsening inflation, despite the recent softening of oil prices. The Consumer Price Index for all items shows the inflation rate averaged 2.6% a year from 1992 through 2007 but has doubled since January, reaching an annual rate of 5.6% in July. By next year, the monthly figure could hit double digits, and the inflation rate for 2009 overall could triple 2007’s 2.85%.

Anyone who hasn’t been living in a cave for the past year knows that oil prices have soared and pushed up the prices of gasoline, diesel fuel, and heating oil. Largely hidden from view, however, have been steep and continuing price increases across the whole spectrum of commodities.

Oil almost doubled in price, from $78.21 in July 2007 for a barrel of benchmark crude, to $145, where it peaked before dipping below $120. But from a longer perspective, oil sold for about $30 a barrel during 2003 and much of 2004. Thus it has actually quadrupled in five years. Coal, traditionally volatile, sold for about $30 a ton during 2003, peaked briefly at $63 in 2004, and went for $45.25 at the end of July 2007. A year later it hit $139.50 before slipping back a bit. It has tripled in 12 months.

Copper, another basic commodity, went from 82¢ a pound in July 2003 to $1.14 a year later, and to $3.72 by the end of last month. That’s an increase of 350% over five years. The price of steel has climbed from under $240 a ton for hot-rolled steel coil throughout most of 2003 to $1,125 a ton last month, quadrupling in five years.

Grains have also soared in price. U.S. corn prices jumped from $3.01 a bushel in July 2007 to $5.37 one year later. Wheat doubled from $3.05 a bushel in July 2006 to $6.02 last month. A Midwestern bakery owned by one of our portfolio companies turns out 13 million pies a year. The cost of ingredients of a standard pie jumped 100%, from $1.20 a year ago to $2.40 today.

The first step in solving the problem is to recognize that we have one—and it is serious. No American housewife has any doubts about that. Our policymakers shouldn’t, either. Yes, Irene, the worse is yet to come.

U.S. Recessions

JUst a few facts I found that I thought my readers might find interesting, especially on the causes of the recession we have faced since 1950.

1953 — Inflation caused by spending during the Korean War prompted the Federal Reserve to tighten monetary policy, causing a one-year recession.

1957-1958 — A recession hit developing countries the hardest because industrial nations sharply cut their purchases of minerals and farm products. U.S. unemployment rose during this period but, unusual for a recession, prices did also.

1973-1975 — The Organization of Petroleum Exporting Countries, or OPEC, quadrupled oil prices. That and the ongoing expense of the Vietnam war caused two years of inflation with little or no growth.

1980, 1981-82 — The Federal Reserve’s sharp rise in rates to quell the inflationary period of the 1970s and another spike in oil prices, this time triggered by the Iranian revolution, tipped the United States into a brief recession in 1980. A short expansion was followed by a deeper downturn from 1981 to late 1982.

1990-1991 — A credit crisis prompted by the insolvency of many failed U.S. savings and loans and a spike in oil prices during the first Gulf War resulted in a contraction followed by several years of sub-par growth.

2001-2002 — The bursting of the dot-com bubble, the Sept 11 attacks and corporate accounting scandals induced a relatively short and shallow recession followed by two years of slow growth.

Does any of this look familiar to anyone else?

More Economic Good News (Sarcasm)

Job losses in the US are mounting as inflation, the credit crunch, plunging home values and tighter family budgets are combining to produce a perfect storm of economic malaise, which is threatening the livelihoods of tens of millions of working people.

The private sector eliminated 79,000 jobs from May to June, according to a survey of nearly 400,000 US businesses released Wednesday by Automatic Data Processing, Inc. The ADP National Employment Report said the decline was “broad based across industrial sectors and suggests continued weakness in employment.”

The goods-producing sector slashed 76,000 jobs last month, ADP reported, with manufacturing employment falling by 44,000, marking their nineteenth and twenty-second consecutive monthly declines, respectively. Service jobs also declined by 3,000, the first fall-off since November 2002.

Construction and financial services related to home sales and lending are the two sectors of the economy hardest hit by the housing and mortgage crises. In June, ADP reported, construction employment dropped by an additional 34,000 jobs, marking the nineteenth straight monthly decline. A staggering 349,000 construction jobs have been lost since the peak of August 2006. Three thousand jobs in financial services were also lost in June.

One thing to watch is the price of gold–if it continues to rise it is good indication that the indicators will predict a deeping recession.  Sorry, but there is no good news for the middle class in the economy.

US Fed To End Rate Cuts

Ben Bernanke, chairman of the US Federal Reserve Board, indicated Tuesday that the Fed would hold interest rates steady in the face of mounting inflation and the depreciation of the US dollar. He departed from tradition, whereby the head of the US central bank refrains from making public comments on currency questions, deferring to the treasury secretary, to say that “in collaboration with our colleagues at Treasury, we continue to carefully monitor developments in foreign exchange markets.”

He went on to say that dollar weakness had “contributed to the unwelcome rise in import prices and consumer price inflation,” and declared that the Fed would be “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.” Bernanke added that the Fed would “formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

That policy, aimed above all at averting a major bank collapse and financial panic, came to a head with the Fed’s moves last March to prevent Bear Stearns from filing for bankruptcy protection and to forestall other Wall Street failures by allowing major investment banks to borrow directly from the Fed—a move unprecedented since the Great Depression of the 1930s.

The Fed’s policy of bailing out Wall Street contributed to the downward pressure on the dollar and an explosive run-up in the price of oil and other basic commodities.

Bernanke somewhat obliquely referred to the recessionary implications of his dollar-boosting, anti-inflationary shift by noting that “the demand for US exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit.” The growth of US exports has largely been the consequence of the cheaper dollar, which lowers the relative cost of exports and increases the cost of imports into the US.

A central concern of the Fed and of financial markets is to preempt what are referred to as “inflationary expectations.” This is largely a euphemism for wage increases. The job-cutting impact of recession will be used to undermine workers’ demands for wage hikes to offset rising prices.

According to statistics released Wednesday, the cost per unit of labor in the US rose at an annualized rate of 2.2 percent in the first quarter of 2008, a figure significantly lower than the current inflation rate of about 4 percent. In real terms, wages in the US are falling at a rate of almost 2 percent a year.