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FloridaCMPS (< 20)

Inflation: Hidden Giant Waiting to Attack?



February 21, 2009 – Comments (5)

On Friday, we saw the release of the CPI (Consumer Price Index) and it showed inflation to be tame overall, actually falling into Bernanke's concerns, deflation.  Even when you look at the Core CPI, removing volatile food and energy from the equation, you still only see a small inflationary rate over the last year, just 1.7%.  But is the inflation rate really that low, or is it that the CPI is not showing reality, at least not yet?

First off, CPI can be manipulated somewhat, so let's just look at what we buy in the supermarkets everyday.  Everywhere you look, if you look closely enough, you can see "hidden inflation."  You can see it in the packaging of the products we buy, as the prices have not changed while the packaging has actually shrunk.  You may not even notice it, but look again and you will see that a half gallon of ice cream is no longer a half gallon.  A jar of peanut butter may have a larger dome in the bottom to hide the fact it is smaller as well.  Just take a look at a lot of the products you buy daily and you may very well see that inflation is being hidden right in front of your eyes.

Now, what is inflation in reality?  In a post I did a while back, When Lethargic Rabbits Start Running, I discussed inflation in detail along with the real problem today, which is the velocity of money.  Please read that post, or even re-read it, before you continue as its key points will be brought up again.

While Bernanke and his buddies keep bringing up deflation, etc. to justify their positions (and desires), reality lurks in the darkness.  Bernanke stated in his 2002 speech that he wants nothing more than to debase the dollar in order to create inflation.  Evidence shows that the broad money supply (M3) is back on the rise, including growth in the required reserves at depository institutions, hinting that the velocity of money is rising again (aka lethargic rabbits start running), with some believing that double digit inflation may be seen later this year.

Adding to the problem is the fact the Federal Reserve may begin monetizing Treasury debt due to the likely drop off of foreign demand in US Treasuries, which we are already seeing.  With the Treasury needing to increase fundings to cover the stimulus package and the additional relief/bailout efforts, the Feds may be buying up Treasuries and will assist in reigniting inflationary pressures.  Wonder the truth of that, just read the Fed's last FOMC statement where they outlined it...

"The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."

With the government printing presses running full-time around the clock, the debasing of the dollar as commanded by Bernanke is in full swing.  The only saving grace we have right now is that the US dollar is still the best of the worst paper out there and that is keeping the dollar's value alive, which is keeping much of the commodity prices in check as well.  Gold is not taking the bait, though, as it is back over $1,000, so gold traders are signaling inflation is alive and well.

What does this mean for mortgage rates?  Mortgage bond traders, you know those mortgage backed securities that I told you are the driving force of mortgage rates, are already signaling their concerns about inflation by preventing mortgage rates from dropping further.  As chart patterns solidify, all signs are indicating that mortgage rates will be climbing again and may very well do so even if the Feds buy all the MBS.  Of course, that all makes sense since inflation is the arch enemy of bonds, mortgage bonds included, and as their prices drop, yields rise and that translates to higher mortgage rates. 

Now, all of you sitting on your butts waiting for those government promised lower mortgage rates should stop laying your faith in our government and just buy that home or refinance before it costs you too much to do so.  Those promised lower mortgage rates may very well never be seen!!!

5 Comments – Post Your Own

#1) On February 21, 2009 at 9:48 PM, jesusfreakinco (28.13) wrote:

I generally agree, but am not sure as to the timing.  A lot depends on whether the Chinese continue to buy debt.  If they don't games up sooner than later.  If they do, the invevitable will get postponed.

Gold is certainly becoming a hedge against uncertainty regardless of the timing on inflation.


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#2) On February 22, 2009 at 10:04 AM, SCMR2242 (< 20) wrote:


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#3) On February 22, 2009 at 10:25 AM, cbwang888 (25.54) wrote:

Inflation in foods. Deflation in clothes, house, transportations, autos, electronics, entertainments, ...

Simply supply and demand. People eat more when they are depressed.

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#4) On February 24, 2009 at 11:44 AM, OleDrippy (< 20) wrote:

Inflation is a monetary phenomenon. Like you said, velocity has to be taken into consideration. Money printed means nothing if it isn't used. We are at the proverbial fork in the road, IMO. Either things will get better and we will return to our old consumption habits thus creating hyperinflation, OR we have experienced a fundamental shift in our culture and we end up like Japan and stagnate.

For some reason I am inclined to believe we will fall into the latter scenario. Green is hip, less is more, Boomers aren't spending and they certainly won't be investing like they used to.. I think things will continue to grind slower. JMHO.

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#5) On July 10, 2009 at 2:15 AM, juliawah (< 20) wrote:

All I really want to say today is: "Watch out people, the whole thing is falling apart. Assume that it will, and act accordingly. The risk of not doing so is simply too great." I'm not talking about money, or only about money at least. It's time to take a good look around and see where you are. Where is your family, where are your friends? Can you bring them closer to you, can you wake them up? What can you provide for yourself in you present setting? Can you feed yourself, your kids, your parents? hosting or those of us who follow the economic news it must be clear by now: there are no green shoots. And there never have been, as I've consistently maintained throughout. It was all just make believe from the get-go. The Obama administration never believed their own stories either (they're not that "thick"), they were just playing for time. If the polls tell you that the truth will take away the grip on power you worked so hard to achieve, you steer clear of the truth. It's called politics. 

People often ask me why I think politicians would keep on repeating things they know are not true. Why, if they know better, they don't warn their voters. And it's really as simple as that: politics is a form of brain damage. Those of us who don't have the drive to seek power have a hard time understanding what it is that makes some of us so eager to make decisions that influence the lives of countless others. But those who have that power will do -almost- dedicated server anything to hold on to it. The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s "typical estimate", long-term rates have to climb 2.5 percentage points. He added: "Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points." Economists are predicting a wide range of ratios but Mr Congdon said it was "not unreasonable" to assume debt doubling to 140pc. At that level, Mr Laubach’s calculations would see long-term rates rise by 3.5 percentage points.

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