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  • gstocks1977 gstocks1977 Jun 11, 2009 1:57 PM Flag

    Inflation: Forget About It!

    On yahoo finance

    With signs the recession is almost over and no end in sight to the government's borrowing binge inflation hawks are circling the market
    Well they better keep looking say skeptics of the inflation spike scenario
    I think it's blown entirely out of proportion says economist David Jones of DMJ Advisors
    Inflation is going to stay lower than expected for awhile adds Ram Bhagavatula managing director at the hedge fund Combinatorics Capital
    Unlike in past recovery periods inflation is unlikely to rear its ugly head anytime soon; in fact it may be years before it becomes a legitimate threat to the economy
    I think weak demand is the primary driver [in the equation] says Bank of Tokyo-Mitsubishi economist Chris Rupkey
    So do many other economists
    The strong driver of weaker demand is partly because consumers are on are a savings spree for the first time in 25 years says A Gary Schilling who runs his own consulting firm
    Economists note that consumer spending has been falling for months even though income has been rising partly because of stimulus plan tax cuts High earners-typically the big spenders- are still feeling the pain of huge declines in stock and house prices
    It is silly to worry about inflation when we are tackling serious questions about wealth loss says Bhagavatula
    What's more another key inflation ingredient-wages-are flat amid spiking unemployment Some companies have actually cut wages for the first time in decades
    Wages are 70 percent of the cost of production says Jones which will limit if not prevent price increases on the producer level even if companies are tempted to pass along rising commodities costs
    Schilling adds that there is still a surplus of excess inventories because producers were caught flat footed when the economy fell off a cliff after the collapse of Lehman Brothers last fall
    Given all that Schilling is among those economists who say deflation not inflation is still the greater likelihood
    Japan's decade-long recovery from the collapse of its asset bubble which included massive government spending and borrowing was marked by modest yet nagging deflation and never unleashed inflation
    Recent data supports the deflationary concern The consumer price index In March and April year-over-year declines-the first in more than 50 years
    That's little consolation for inflation hawks however who point to the a doubling of crude oil prices in recent months and another worrisome decline in the dollar There's also the matter of rising market interest rates as investors demand higher yields on Treasurys because of the government's growing borrowing needs-as recent auctions indicate

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    • recession over! That is funnier than hell

    • In the past some combination of those factors has spelled trouble such as in the late 70s and early 80s which were fueled by the government's borrowing boom of the 1964-1973 period when it funded both Great Society domestic programs and the Vietnam War
      Historically it has taken ten years for inflation to take off says Rupkey
      Nevertheless such hyper-inflation has been the exception not the rule in the modern US economy
      The total lack of fiscal discipline on the part of the Obama administration when it side by side with a Fed giving us so much unconventional easing could in the future-way down the road- could give you that [inflation spike] admits Jones
      Some economists expect GDP growth over the next decade to be lower than the last two-three decades-averaging 2 percent They are also somewhat dismissive of the oft-cited tell-take signs of trouble
      Bhagavatula says low interest rates are driving cash into he stock market rally which should tell you something
      Jones calls the oil rally a speculator's binge
      Schilling expects the Fed to be aggressive in pulling back when the recovery takes off and expects the boom in domestic savings - he's estimating $55 trillion over the next decade-to finance a lot of the federal deficits
      So keep those inflation expectations to yourself
      Insane is a good word for it shrugs Rupkey But that's what the market does with these issues

 
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