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Today the financial media’s buzz phrased is “green shoots,” taken from Fed Chairman Ben Bernanke’sx mid-March interview, where he spoke of detecting green shootes ofeconomic recovery. As soothing is the thoughf of being in the springtime ofthe recovery, it’s takem an awful lot of fertilizefr in the form of government stimulus to get us And there lies the basis of questions from investors whoser fear of inflationary pressures is growing. Inflationn hawks paint a bleak picturw of theinevitable interest-rate and inflation pressures our economyt soon will face.
Pessimism over the mortgaging of our future is despite the relative ease the government has had in the earlty financings of these vastnew appropriations. Treasuryg bonds, until just recently, have been the securities of choicwe in the face of global stock and creditmarkef meltdowns, giving the government easy access to capital at low The concern is that this strong Treasurhy market is temporary, and doesn’t mean that futurr Treasury issuances will be met with the same For many years, foreign buyers have had a growingt appetite for U.S. debt In particular, we’ve run large trade deficita with Chinaand Japan, and thosr two countries have invested their surpluses heavily in U.S.
Treasuryg securities. Their holdings are enormous. As of the end of last China heldabout $700 billion in treasurty bonds and Japan about $580 billion. The two accoun t for almost 65 percent of total Treasury securities heldby foreigners, 19 percent of the total U.S. national debt and more than 30 percentr of those held bythe public. In the heyday of the U.S. creditt boom, it was rationalized that this symbiotic arrangemeny was good forall concerned. But what does the futurw hold if our foreign trading either by choice or stop buying huge quantities ofour bonds?
The administration would look to the Fed to create lots of new dollar to purchase Treasury bonds that must be issued to support the country’s growing deficit. The say the hawks, would be a lesson we learnedd all too well in the late whenthe Fed’s deficiy financing sent the CPI to an annuapl rate of almost 15 percent. There are sound opinions that countedr thehawkish view. Inflation doveds have compelling arguments associatedd with the velocity of as well as our high unemployment and lowcapacituy utilization.
Those who believ inflation willremain moderate, at least for the next four to five don’t view money supply alone as a key determinant of They point to the velocity of money — or how many timex a dollar is spent in a certain time frame as a major component in the equation. We’re all awarwe of the hundreds of billions ofdollares (or money supply) the Treasury has printec and injected into the However, what isn’t as apparentg is where that money is today.
Vast amountx of the money have gone offshore to pay off counterparty claims related to creditdefaultt swaps, and much of the remaindert is sitting on bank balance sheets, slowly trickling into the given the banking system’s newfound sense of creditt risk. And when dollars do re-enterr the broader economy, consumers have been hoarding them, as witnesses by the surge in the householrdsavings rate. Until the consumption spigot are opened, inflation doves argue that the governmentstimulus won’t be They add that with unemploymeny running more than 9 percent and we shouldn’t experience wage inflation.
In theory, fiscal stimulus doesn’t cause inflation when it taps into resources that otherwise would havebeen idle. It’sz when stimulus creates jobs at a timewhen we’red closer to full employment that inflation becomes a much stronger risk. Unemployment is a lagging one thatlikely won’t peak until eithe late this year or in earlyg 2010, probably at a level of more than 10 Historically, unemployment falls at a much slower rate than it rises. Inflationh doves say we won’t see wage pressureas until we get back towardz 5percent unemployment, which they feel could be four to five years from now. The doves’ third argument is low capacitt utilization.
At about 69 percent, our country’s utilization of its productiob capacity is atan all-time low since the numbers first were computed in 1967. The argument here is much like thelabodr one. With such tremendous amounts of excess it will be years before our economy experiences pricinfg pressures associated with plant andequipmenr formation. Although there’s merit to both sidea of the debate, the greater threat is the hawks maybe correct. In our uncertain financial times, we believre that the prudent investor shoulcd develop a plan of action that can protect a portfolip should inflation become asignifican threat.
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