The Banking and Strategy Initiative

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Inflation is the many splendoured thing, then!

One cannot really manufacture inflation overnight

An op-ed in the New York Times doing the rounds on Twitter, mentions the great inflation argument seemingly now the lead in Bernanke’s set of tools to stimulate under

IN all the commentary about Ben S. Bernanke’s recent speech in Jackson Hole, Wyo., little attention has been paid to six crucial words: “in a context of price stability.” Those words concluded a discussion by Mr. Bernanke, the Federal Reserve chairman, of what tools the central bank could consider appropriate to promote a stronger economic recovery.

[Related  Inflation Slowed in August, Reflecting a Weak Economy (September 16, 2011)]

Ordinarily, a central banker’s affirming the importance of price stability is not headline news. But consider the setting. There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.

A basis tenet of the above economic debate is that inflation is yet around the corner. Unfortunately, now even inflation goalpost seems to be past ( much like Matt Hasselbeck’s QB career at Seattle till last year or if you are on this side of the pond, Liverpool in the field after a great financial recovery compared to the go to IPO Man United. One obviously conjures up very distinct personas in both games when one tries to recover  a comeback) Very frankly, it is unlikely that inflation will be making a come back so easy. For one, my manufacturing production, not just in China  or India where rates were tempering it, has gone under. Now when i want to stimulate all round growth and inflation, I end up with nada, zip, nothing. No inflation to speak of. I could have encouraged inflation when I had the chance. Unfortnately, in a market economy everyone thought things will stay good till everything came down together in June and housding or jobs never went up.

Also buying an Operation Twist may fall short of raising expectations in the Economy, while a QE3 can burn the house down without any insurance to claim. So ..a tough call for the US economy and so the world for the next 6 months.

Unfortunately, those bearish on America six months ago that lost in the punctured US Treasury yields too when they went short on US treasuries may be responsible for the above situation yet unable o see it themselves, seeing in their analysis a link to six months below but finally getting it right when they say growth is now a tougher proposition for the USof A 


“I’m more convinced we are headed in that direction,” said Scott Mather, portfolio manager at PIMCO, the world’s largest bond fund with $1.2 trillion in assets under management. “We might have an even harder time than Japan did.”

President Barack Obama confers with Federal Re...

Image via Wikipedia

Not all economists believe the United States will repeat the Japanese experience, but markets have been flashing warning signs.

Three years after the United States’ housing bubble burst, 10-year Treasury yields are struggling to stay above 2 percent, while stocks have declined every month since April.

Japan’s 10-year yield has not closed above 2 percent since 1999 and the Nikkei is 77 percent below a peak hit in 1990 before a commercial real estate bubble burst.

U.S. economic output through the second quarter of 2011 has yet to surpass the level seen before the crisis hit in 2008 and may not do so soon; economists polled by Reuters give the country nearly one-in-three odds of falling back into recession over the next year.

“The financial turmoil of the last three or four months has been the markets coming to terms with a period of prolonged slow growth,” said Andrew Scott, professor of economics at London Business School. “With households paying down debt and not consuming, it’s hard to see where growth will come from.”

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