None of what you have said makes sense, in fact it's a complete contradiction. You think Economic growth will slow, the Fed will cut, inflation will rise and the long bond will crash?
I'm not trying to be arrogant or a dick or whatever, but it doesn't make sense. If economic growth slows, the long bond will rally and the deflationists will be proven right. It's that simple. Even ask Misheldo on this one.
LIG, that's the nicest and most civil you've been when you've disagreed with someone's statement. What a pleasure.
The Fed has convinced everyone that the only reason for inflation is economic growth...ergo, if growth slows down so will inflation.
Right now I think inflation is running at least 6%/year. (I know you disagree.) My health insurance premium is up 8%. I know the restaurants I frequent are significantly more expensive than a year ago. I go to the grocery store and I can't believe how much shit costs. Mrs. Ork buys me bags of granola that cost $8 and last for two breakfasts. They were $6 a year or two ago. Yeah, some things are probably down. Mrs. Ork spends time scouring ads for bargains and can come home with a cashmere top on which she blew $25, but that's because the world is awash in capacity created with easy money.
I think the most instructive way to look at inflation is to see how people without a lot of money and no assets have been squeezed over the years. When I finished undergraduate school in 1980 I took a job at a prestigious Fortune 500 company in their financial executive training program. My salary was the princely sum of $16k/year. The kids in marketing taking similar jobs with ad agencies got $12k/year. I remember thinking I was making a decent salary (although I was making less than I was when I was in school and driving a Boston cab for extra money). The kids working for ad agencies really had to scrape by. Fast forward to today. Eighteen months ago my nephew graduated from Michigan and took a job with a large, local ad agency. His salary...$24k/year. I know I'm just looking at one datum out of a country's worth of data, but I think it's instructive about how people in this country have been squeezed over the years. Although a single guy making $12k year in 1980 didn't live well, he lived like a king compared to my nephew. For years the gov't has said there's no inflation, but people who live from paycheck to paycheck have it much tougher today. Not only haven't their wages kept up with inflation, they've suffered bracket creep as well.
Anyway, I think that the bursting of the housing bubble is going to slow economic growth tremendously. The only reason the economy has had any strength at all the last five years is the housing ATM (half the jobs created during this time have in one way or another been created because of housing). I do agree with Mish that this process will be deflationary, but that doesn't mean that the cost of everything is going to go down. Rather than focus on what may or may not go up or down in price, let's look at the effect on longer bonds. Housing problems are going to widen credit spreads because there are going to be many more defaults. People just have too much debt. This will negatively impact longer bonds. Concurrently and somewhat ironically, an economic slowdown is going to reduce foreign demand for our debt, which will put further pressure on bond prices. This whole process will put pressure on our dollar, making imports (including a big one, energy) more expensive.
In response to these problems, the Fed will do the only thing it knows how to do, cut and print. This time, cutting short term rates isn't going to help lower long term rates because it can't save the housing bubble. Once a bubble bursts it can't be reinflated. The housing bubble bursting is going to set in motion the problems discussed in the preceding paragraph. Where's all of the money going to go that the Fed's going to print? The next bubble...gold and precious metals. |
