David Lentz

Bonds Signal Fed Should Start Raising Rates Soon

I've been hearing the "deflation is dead" story throughout this year. When one looks at the statistics that supposed "prove" that case, and step back an look at a 2-3 year interval of data, it always becomes clear that what has been mistaken for an upturn is merely statistical noise.

So long as the economy continues to shrink, with retail sales trending lower and unemployment higher, deflation is still alive and well in the economy. It may not be the roaring force that it was a while ago, but it is by no means dead. If it were, we would see gold quickly jump past 1000 and head skywards. But when we look at the broader monetary aggregates, we see M2 (and if you look at shadowstats.com, the reconstituted M3) trending lower.

Deflation isn't dead, it's just catching its breath. For the Fed to kill deflation, they would have to either print so much money that they would also kill the dollar, or else they would have to go after the banksters, and erase the hoard of toxic debt (masked by the mark-to-model rule) via bankruptcy. Neither seems likely to occur.