Saving grace of slow money

With all the money being pumped into the economy from the Feds, Tom Campbell says we may be looking down the wrong end of 13% inflation in about a year, as soon as the velocity of money picks up.

Paul Krugman says “don’t worry be happy”, inflation is econo-imaginary boogeyman and a bit of inflation will pint-size the debt, anyway.

The story here is why I think the answer will lie somewhere in the middle. If there is one fundamental change that we may be facing is that Americans may begin to save more. Not Asia type of savings, but more than in the recent past. If inflation creeps up, Bernanke and co will have to jack up interest rates which will also create and incentive for increased savings.

So jacked up interest rates and increase in savings may both contribute to lessening the return of high-velocity dollars, which may in turn dampen inflation so it’ll just be high, rather than very high.

Money quote:
With income growth far outpacing spending, Americans' personal savings rate zoomed to 5.7 percent, the highest since February 1995, the Commerce Department reported Monday.

Bathing in Inflation?

Taking a warm bath in all the new money floating around may feel good now, what with the frozen credit markets, but as the economy stops cooling and begins to warm up (even ever so slightly), will the rising temperatures also cause inflation to heat up. (I think this metaphor really got away from me.)

To me, this is a key point:

Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says.

A lot of floating money may make sense now, but soon the time may be upon us when we need to start drying out this extra liquidity (run-away metaphor again...really, I shouldn't quit my day job...) Hopefully a sense of pragmatism has taken over the financial ruling class and they'll be willing to take the tough decisions to cool down inflation at the first sighting.

Bernanke Bet on Keynes Has Meltzer Seeing 1970s-Style Inflation - Bloomberg.com

Inflation genie...

.... we shouldn't let it out of the bottle.

Nouriel Roubini speaks and as you'd expect, the news isn't good (well, he's called Dr. Doom for a reason)
.

I see Roubini covered a lot in the Canadian press. I think his general crappy outlook on the world suits the alienated Canadian perspective.

He's the "ghost of unregulated banks present" and I think Canadian like him because he's walking justification for the regulated bank past that Canada has been through.

Hoping for higher rates

So here's my call.. I'd love to see interest rates begin to creep up, it would add some stability to the US markets. Higher rates would send a signal to the market that the fed is serious about shoring up the dollar and tackling any hint of inflation (well, it is more than a hint now).

So higher rates would mean strong dollar, curb in oil prices and a reduction in inflation expectations. All those things would be a huge help.

Don't think it would impact consumer lending right now because how much of it is now going on? Would hurt an already wounded housing market, though.

Has Danger to U.S. Economy 'Diminished'? : NPR

Inflation's march...

... continues. Energy and commodity prices go up, which is now leading to a rise in other material and manufacturing costs.

Dow Chemical hikes prices 20 percent, citing energy - Yahoo! News

FT.com / Markets / Insight - Insight: Life won’t be easy in the ‘nasty decade’

And I was having such a good day....

FT.com / Markets / Insight - Insight: Life won’t be easy in the ‘nasty decade’

War on savers

Inflation is eating away at your money faster than a normal savings plan will grow it. Bottom line, it now costs money to save. Seriously, how did we get into this mess? (That's a rhetorical question).

If increasing savings in the US was difficult before, it is actually counterproductive now. There is actually no point to save. This is great news for fans of foreign deficits

Here's the money quote on how depressing the situation has become:

"As I pointed out last week, one of the few things you can do easily to avoid this trap (inflation) is to buy some of your family's non-perishable foods, like pasta and canned foods, ahead of time and in bulk. Their prices are rising much faster than your savings are growing in the bank."

Fed Move Is Tough News for Savers

Food inflation and biofuels

Food inflation is terrible but even more worrying are some of the steps being taken in an attempt to manage it.

Run-down on the whole problem in this article: Food Inflation, Riots Spark Worries for World Leaders

Here are some money quotes:

The global effect of export barriers, however, is to drive food prices even higher than they would be otherwise. Such policies "distort global prices," said Mr. Simsek, the Turkish finance minister, in an interview.

Yep, totally agree.

During informal conversations and interviews, ministers mainly agreed that the U.S. policies on biofuels were especially harmful. U.S. ethanol is made from corn, which, ministers said, could be exported to feed the hungry, and benefited from tariffs that block Brazilian ethanol, which is produced much more efficiently from sugar cane.

Ummm... Where have I heard that before?

For the Fed, a Recession -- Not Inflation -- Poses Greater Threat - WSJ.com

Can't think of any commentary at the moment... but take a minute to go through this, it is a good read.

China and inflation

Paul Krugman again weighs in on China and inflation.

Basically, he says that an increase in the price of Chinese goods is not sufficient to cause US inflation. The actual China cost is just a small percentage of a US price; transportation, overhead and so on form a greater percentage of the total cost of a good.

True. I think China's impact on US inflation is more indirect.

1) China has a huge demand for commodities. It's additional demand is causing the price of the supply to rise.

2) Commodities are priced in US dollars. With the dollar tanking, the price of dollar denominated goods will rise.

This combination will continue to be a nasty one-two punch on the US economy until either demand dries up (not likely) or the dollar strengthens, but it is hard to see how that will happen with interest rates so low and probably going lower.

U.S. Import Prices Soar, Boosted by Chinese Goods - WSJ.com

Increasing global demand pushes prices up, and a dropping US dollar makes more expensive goods seems even more expensive.

This shouldn't surprise anyone

U.S. Import Prices Soar, Boosted by Chinese Goods - WSJ.com

Update: More on China and inflation.

What retails sales really look like

Scroll to the bottom of this post to see what retail sales really look like.

Yesterday, there was a lot of excitmenet about retail sales actually ticking up.

But it seems that if you factor in inflation (ie: nominal sales numbers looking good not because there was more valume of sales, but because prices were higher), retail sales were negative.

Finding the dark cloud in the silver lining

Yay!!! Retail sales are up!!!

Boo.... it is because of inflation....

:-(

Here's the money quote:

Part of the gain, however, stemmed from higher gasoline prices. Retail-sales data aren't adjusted for inflation.

Recession to be longer than usual: UMich | U.S. | Reuters

Recession to be longer than usual: UMich | U.S. | Reuters

Here's a quote:
Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.

True, but increasing US savings would also reduce the trade deficit and would also help shore up the dollar. Increased savings may also do more to boost lending than the current reduction in the interest rates. Increased savings would keep more money in the US system and mitigate the necessity for aggressive monetary policy.

I'm also guessing that consumers with more savings in their accounts would also be a lower credit risk, making them more attractive to banks.

And finally, increased (and sustained) savings in the US means there won't be a generation of pensioners in about 20-40 year without enough money to live off of.

I'm not begging to a long and deep recession, but if it hurts enough to in some ways impact the mentality of the current generation and encourage them to save more, borrow less and spend within their means, then the current period of pain will be worth it in the long term.

And oh yeah… what would a post be without my obligatory warning on inflation (which increased savings would also help mitigate.)

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.

The Harvey Dent economy

The economy.... is turning into the deadly Two-Face. Impeding recession pushes interest rates down, but looming inflation would push them up.

The money quote:
He said he expects core inflation, which strips out volatile food and energy costs, to remain above 2 percent, "which is above the range I consider to be consistent with price stability."

Lacker also said it was worrisome to see inflation at current levels. The overall consumer price index rose 4.1 percent in the 12 months to December, while the core rate, which excludes energy and food, climbed 2.4 percent.

"We can't cut interest rates as aggressively in response to weakness in growth as we otherwise would," Lacker said. "We're going to be posed with some problems this year if inflation doesn't moderate the way we'd like to see it moderate."

China exports inflation

I guess I'm in the mood to read and write about inflation this evening...

Here's a piece in the NYT about China's inflation being exported to the US.

Krigman, however, thinks the piece overstates the case.

You know, it wasn't that long ago that I'd spend my Saturday nights out partying rather than blogging about economic issues that, in all truth, I really don't know a whole lot about.

Inflation in Europe

The Europeans are taking inflation much more seriously. But I'm wondering if their main inflation worries are trying to stamp out inflation expectations amongst the population.

When workers begin to expect inflation, they build it into their wage demands and in effect it becomes a self-fulfilling prophesy. People get inflation because they expect it and price it in themselves.

The ECB seems to be aware of that and is trying to nip expectations at the bud.

I would thing that other price increases, especially for imported goods, would be mitigated by the super-strong Euro. (Strong Euro increases the ability by Europeans to buy goods on the global market.)

Let's talk about inflation, baby

FINALLY... amongst all of the talk about interest rates and recession, someone bring up the problem of inflation.

I've been yabbering on about inflation for a while but it seemed no one was paying attention to me... I was starting to take it personally.

Greg Mankiw weighs in with:

A rise in expected inflation is not consistent with the conventional wisdom that the economy is on the verge of a serious slump driven by inadequate aggregate demand.

My thoughts (sorta) on that here and here.

In a nutshell, recession talk in the US may be fueled by low domestic demand, but high global demand for products will keep pushing prices up at the exact same time the US dollar (read, American’s ability to buy stuff) drops.

Foreign Demand Aids Durable Goods - WSJ.com

This is one of the more interesting articles I've come across and I think gives some hints as to what is going on in the economy:

1) This is a consumer lead downturn

2) From a US business perspective, it is financial institutions that are in trouble. Sure, financial institutions are important but when we talk about an economic slow-down, is it really impacting US businesses across the board or is it focused on one (admittedly large) segment of US enterprise?

3) US manufacturers like the low dollar. That is good in the short term but what happens when/if the dollar goes back up?

4) I still equate low-dollar with the inevitability of higher inflation... it is out there, somewhere.

Foreign Demand Aids Durable Goods - WSJ.com

American recession, global inflation?

I heard from an economist the other day that the world may be heading towards both a US and China slow-down. The US slow-down (recession) he argued will be relatively mild and not have a great impact outside the US. A China slow-down would hurt emerging countries (because China buys all of their commodities) but will have little impact on the West.

But what about a US recession and continuing strength in China? Economic growth slows domestically and the dollar drops, but global prices remain high and even climb?

The US faces recession from within, and inflation from without. That could greatly exacerbate what may otherwise be a mild US slow-down.

The economy | A delicate condition | Economist.com