The Fed Considers Inflation vs. Deflation

By Bob O'Brien

With the Fed in meetings the next two days, and fears of heavier inflation much greater than ever before, Bernanke and company find themselves in a very difficult spot and will have to tip toe around inflation fears and focus on their bigger fears of deflation.

There is certain to be some strong language about how they are concerned about inflation, and yet are certain to be looking to do more to prevent deflation.

The bottom line is that they just cannot let long term rates get too high, and therefore smother this already weak economy. These fears of deflation will easily take precedence over inflationary fears.

The U.S. economy is still facing rising un-employment, massive foreclosures, and historical credit card defaults.

The Fed is not going to raise rates, but there will be very strong language in regards to them moving away from buying more treasuries. They will continue to help the banks and buy up a lot of the toxic assets such as mortgages etc.

I wrote in an article a couple of weeks ago, Why the Oil Roller Coaster Ride is Over, I stated that I thought that oil prices would cool off and they have. This teeter totter trend, from fears of inflation to fears of deflation is the razor’s edge in financial markets.

The Fed will look to bring back fears of deflation into the market, the kind that keeps oil prices low and the dollar afloat.

As a Fed concern, deflation is still winning in the short term, but inflation is definitely going to win the war.

The fact of the matter is that inflation in the US has been out of whack for years. We have had hyper-inflation in nearly all the major domestic costs like real estate, healthcare, and education, while being told that inflation is under control. While there has been little inflation or deflation in things like autos, TV’s, and anything we import. Does anyone really think there will be economic harmony over next 10 to 20 years?

In the long term high commodity prices are here to stay and this does not and bode well for the US economy, or any economy that is addicted to things like oil. It does however bode well for countries like Australia, Brazil, and Canada who are exporters of commodities.

Comments

[Dave Wrixon:]

Ben wants to create a highly inflationary environment without causing the dollar to implode.

Chances of success are rated form Nil to Zero.

Jun 24 04:11 AM

[TradingHelp...:]

Dave is calling it right. The US needs inflation to reduce the real value of it's trillions of debt. Not too much, but enough to reduce the burden over the next 5-10 years. A weaker dollar is also a unspoken aim.

Jun 24 07:34 AM

[John Bowman:]

The debt is bad enough on it's own. What about the interest on the debt with increasing rates?

Jun 24 09:57 AM

[MadScientist:]

Lots of interest on the $USD right now ahead of today's comments. Historically, we are at a very weak dollar - since 1992 it has traded as high as 121 (July 2001) and as low as 71 (in March of 2008). At ~80 this morning, we are near historic lows, and yet we need a weaker dollar to offset longer term debt.

No one can consider the dollar getting stronger in the linger term right now, given the amount of currency printing going on - short term indicators say it will get stronger (maybe get to 82 or so), but then drop back down (and probably keep going that way).

Jun 24 10:03 AM

[Gregman2:]

"We have had hyper-inflation in nearly all the major domestic costs like real estate, healthcare, and education..." To what degree has debt service played a role in this? Consider all the leverage used in all these areas. Consider the over capacity now in all these sectors.

Jun 24 12:54 PM

[johngonole:]

I agree with the idea that eventually we will have to inflate just to allow the fed govt to pay for its promises. Immigration will be the only other possible solution. Gotta keep those ponzi schemes going no matter what.

Jun 25 03:20 AM

[Shalom Hamou:]

There is a strong possibility of Stagflation or more precisely Depressflation:

The Risk in Long-Term Interest Rates & Stagflation.

blog.yield-curve.net/2...

Jun 25 08:00 AM

[myWealth.com:]

gotta keep those Ponzi Schemes going no matter what.. that is very good, that for the good laugh..


On Jun 25 03:20 AM johngonole wrote:

> I agree with the idea that eventually we will have to inflate just
> to allow the fed govt to pay for its promises. Immigration will be
> the only other possible solution. Gotta keep those ponzi schemes
> going no matter what.

Jun 25 08:41 AM