Yesterday I wrote about false inflation scares and predicted that Wednesday’s inflation report would be scary, not because it would show inflation; but, because it would not.
I was right.
The key measure of inflation, the consumer price index had its steepest annual drop in 59 years.
My prediction was based on the weakness in fundamental economic indicators. Unemployment is still rising and economic activity is flat on its back.
Some (below) have argued U.S. Treasury and corporate bond interest rates have converged because bond investors think Congress, the President, and the Federal Reserve will ruin the dollar by causing inflation. But they are wrong.
Think this is just some professor saying there’s no inflation risk? Nope. I am not alone in my no-inflation worries.
Based on current stock prices, investors in the stock market seem to not worry about inflation either; they see companies who don’t have much pricing power or profit prospects. The stock market wants some inflation.
Bond investors also weigh in. The demand for corporate bonds relative to government bonds is finally equalizing after it seemed investors only wanted government bonds — the so-called flight to safety — at the end of last year.
And money men agree Jason Quinn who co-heads high grade and high yield flow trading at Barclays says instead that “there is so much slack in the economy, it’s very difficult to argue that it’s inflation. With unemployment at 9.4% there is no wage growth, which is the source for core inflation.”
But if there’s no inflation risk, then why are interest rates for Treasury bills rising? Simple—they are rising because they were near zero. But they aren’t rising very much, and certainly not in any way that creates inflation risk.
But why is this fear of inflation being spread around when there isn’t any real risk? Who has a dog in this fight? Not surprisingly, the inflation debate has partisan sides.
The Republican Party and right wing groups want to stop federal spending and the popular Democratic President and Democratic Congress from spending. A group called “Let Freedom Ring USA” started a petition back in February to stop the stimulus package. The Wall Street editorial page did the same thing in a opinion piece on its website called “Why ‘Stimulus’ Will Mean Inflation”
And the Heritage Foundation refers to the Obama plan as “Stimflation” A good deal of the fear of alleged inflation is really a fear of economic and political success for the Obama Administration, disguised as financial analysis.
To repeat—there is no real inflation risk, and there are plenty of unused resources. Thank goodness we have a sizeable stimulus package, or the economy would be in much worse shape. Nine months ago the stimulators said aggressive policies would not stop the recession, but would mitigate a deep recession, or keep us from a depression. The small-government side said government debt would cause inflation.
We aren’t dead yet, so we don’t know who will be right eventually; but the facts weigh in on the side of even more stimulus.
