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If Inflation is Dead, Then…

Posted by Larry Doyle on April 26, 2010 12:17 PM |

Recent reports indicate the dreaded inflation monster has been slayed. Is that truly the case? If the monster has been slayed, is another monster lurking in the weeds, that is the larger monster that embodies economic death known as deflation?

Sense on Cents has debated this topic more than a handful of times over the last year. The mere fact that the topic has been on our front burner is a strong indication that we are not experiencing cyclical developments and changes within our economy, but rather large, structural changes.

Will these trends continue? Will the disinflationary momentum increase to the point where our economy actually enters a period of deflation? Bloomberg addresses the trends of this critically important topic as the economy moves from inflationary to disinflationary in writing, Bond Traders Declare Inflation Dead After Yields Fall:

“The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy,” said Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.

Is inflation dead? Are prices merely stable? Or, is there something more sinister and potentially damaging at work? What might that be? Disinflation trending toward deflationBloomberg touches on this reality:

Federal Reserve Bank of Atlanta President Dennis Lockhart said in an April 15 speech that he is paying “serious attention” to disinflationary pressures. The “moderation in inflation has been broadly based,” Fed Chairman Ben S. Bernanke said a day earlier in testimony to Congress.

“Activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as fiscal fragilities have come to the fore,” the IMF said in the report.

Bond investors are focusing on those “fragilities.” Government debt as measured by Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index has returned 1.35 percent on average this year, compared with 0.9 percent in all of 2009.

“There’s a philosophical battle between those — and I’m in this camp — who feel the deflationary forces are very powerful, versus those who say ‘hey, you’re printing tons of money, you’ve got to have inflation,’” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $72 billion in fixed-income assets. “And they’re right, too. The big question is timing.”

We are now two plus years into the heart of our economic crisis. The deleveraging forces underlying our economy are still very much in place, but they are being neutralized by the stimulative forces provided by the accomodative monetary and fiscal policies provided by global governments.

The battle between these major forces has yet to fully play out. In fact, given the fact these are truly structural forces at work, do not expect that they will be resolved anytime soon.

Navigate accordingly and remain on guard as the dangers of an overall fragile system remain.

LD

  • Fred

    Larry,

    Must this battle between the titans eventually take place to cleanse the system or can gov’t continue to “kick the can” forward and eventually deflate the deflation monster.

    I get the Bernanke Plan, the mistake of the Great Depression was removing stimulus too soon thereby delaying recovery, but is there any historic precedent of massive stimulus for an extended period working to reignite the real economy without inflationary implications?

    Haven’t we in fact been pursuing the Bernankle Plan of “kicking the can” ever since the 1990’s (Long Term Capital, Y2K, etc.), all it seems to create is one bubble after another with each bubble getting bigger bigger?

    • LD

      Fred,

      The “Grand Experiment” currently being played out requires an almost magical if not mythical ability to both generate real economic activity along with the subsequent withdrawal of the stimulus in timely fashion.

      Do we have these types of wizards within our central banks and Congressional halls? I do not think so.

  • whoisjohngalt

    Everything is deflating except Federal Government salaries, pensions, welfare and spending. Atlas Shrugged.

    http://en.wikipedia.org/wiki/Atlas_Shrugged






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