Fed Pres Lockhart in a speech a few hours ago in Paris is summing up well what is the growing angst in the markets that the Fed is sowing the seeds for big inflation with their aggressive steps by saying, “there’s reasonable concern related to the growth of the balance sheet of the central bank in response to the economic difficulties we’re having, that this could over the long term fuel inflation if the monetary aggregates are not managed well and if the Fed doesn’t react at the right time to remove some of the stimulus.” We are thus relying on a Fed that thought subprime was contained at a loss of maybe $150b in 2007 to somehow reverse their massively aggressive initiatives at the exact right time.

The implied inflation rate in 10 yr TIPS today is at 1.40%, up 40 bps in the past two weeks and at the highest level since early Oct. Hopes of a bottom in the global downturn is lifting Asian stocks sharply. Claims data is out at 8:30.

Update: Data

Initial Jobless Claims totaled 652k, about in line with forecasts and up from 644k last week. Continuing Claims continued its march higher, totaling 5.56mm, 85k more than expected and at a new high.

The Labor Dept made some changes to their seasonal adjustments going back 5 years but they said it didn’t have much of an impact on the data. While initial claims have flat lined at a high level over the past few months, the continued rise in continuing claims is evidence of a still deteriorating labor market.

When the economy does improve, whenever that might be, the labor market will lag and therefore should not be looked at as a leading indicator.

Q4 GDP was revised for a final time at -6.3%, .3% better than expected but with just a week left in Q1 the data is old news.

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Threading the Needle”

  1. Chief Tomahawk says:

    Peter B., is it my imagination, or were you interviewed earlier this week by CBS/WBBM radio Chicago during their “Noon Business Hour” program? I could’ve sworn the name given sounded just like yours….

  2. SanFranHobo says:

    I heard that also. But he’s interviewed all the time so its not surprising.

  3. danm says:

    Maybe us inflationists are totally wrong… maybe the bond market will collapse, rates will shoot up and nip inflation in the bud. And with just a few percentage points up, all assets would collapse some more.

  4. Bruce N Tennessee says:

    Well, actually the GDP was worse than initially reported, and the initial claims were higher than expected.


    and frankly, before the original estimate number, few (maybe a few bloggers) thought the gdp would be >-6%…

    Costa Rica looking better and better…

  5. Rajesh says:

    It is much more likely that the Federal Reserve will remove liquidity prematurely in order to satisfy the magpies crying “Inflation, Inflation, Inflation” resulting in a collapse of economic activity as happened during the Great Depression. Inflation is a disease the Federal Reserve knows how to cure. Deflation is a condition that is more dangerous and less clearly susceptible to the tools the Federal Reserve has.

  6. Bruce,


    there’s long been a large ex-pat community in Costa Rica, and, now, a growing cottage industry assisting the transfer process..

    Better Surfing in Nicaragua, though..


  7. ottovbvs says:

    Rajesh Says:
    March 26th, 2009 at 8:59 am

    ……Have to agree……what we’re trying to avoid at the moment is a deflationary move which is hard to do…ask the Japanese…cutting off inflation providing there’s the political will is fairly easy….in fact it’s very easy….I’ve total confidence Bernanke is going to recognize the symptoms and if he doesn’t he’ll have his elbow nudged by Paul Volcker…..as you say there’s a danger he could jump too soon but since the admin and fed are clearly joined at the hip at present I’m not too concerned about it.

  8. could someone explain to me how they see the FedRes ‘sterilizing’ the, growing, Inflationary impulse?

  9. danm says:

    I don’t believe this situation is in any way shape or form comparable to Japan.

    - Japan was a small country relative to the whole world economy. Even if government spent like a maniac, it did not impact the price of materials. If US does anything, it impacts everything.

    - Japan was a net exporter. Cash flow positive so did not need foreign money. US is net importer of oil + needs foreigners to support their debt level.

    -Japan was surrounded by countries where Boomers were coming of age = huge demand coming on stream from countries with strong currency. Not so for US today.

    -The US needs to become exporter and the ROW importers, this implies HUGE structural changes that don’t happen overnight. The Japanese situation did not call for a new world order.


  10. Bruce N Tennessee says:

    Agree with most of your points Danm…however Japan is and was the 2nd largest GDP country…

    Due to their reliance on exports and the thrifty nature of their aging population, they are being economically disemboweled here…

  11. ottovbvs says:

    danm Says:
    March 26th, 2009 at 9:24 am

    ……Japan had problems averting deflation….fact……the point is it’s much harder to do than choke off inflation….fact as Rajesh says….if you want to disagree with that premise by all means do so….. but getting into the weeds of Japan is a bit of a diversion.

  12. Marcus Aurelius says:


    The fed could wipe away deflation with the stroke of a pen. The real question is where the new dollars go. Inflation works against entrenched interests, deflation works for them. The Fed is not about to let that happen.

  13. ottovbvs says:

    Marcus Aurelius Says:
    March 26th, 2009 at 9:33 am
    “The fed could wipe away deflation with the stroke of a pen.”

    …..Not really in a practical sense, but as Rajesh and I point out they have loads of tools for choking it off fairly easily.

    “Inflation works against entrenched interests,”


  14. Marcus Aurelius says:

    “that” being inflation.

  15. Marcus Aurelius says:

    Yes. Really.

  16. danm says:


    I never said Japan did not get deflation. I just think that anybody who looks at history to understasnd what will happen next will get crushed. Just a few years ago, when I talked of the real estate bubble everybody would sneer and remind me that house prices had never declined on a national level. So much for history!

    Yes, Japan is a large economy but the US is MUCH larger.

    I think Amercians know they are powerful but I don’t think they really understand how they carry their weight around. You keep on poo-pooing socialism by showing us examples of socialist policies that don’t work. Socialism needs long term thinking which is impossible to carry out when a country such as the US keeps on forcing short-term thinking down other countries throats. The socialist countires biggest mistakes was to implement socialism while a country like the US was becoming increasingly shrt-term oriented. Many socialist countries are doing very well but when are their policies ever brought forward? Food for thought.

    I think the circumstances surrounding Japan are so incredibly different than those around the US today that I just don’t see the link. Japan’s population at the beginning of the 90s was 10 years older than the Western world (apart from Germany). They were starting to sell to Boomers entering their most spendthrift years!

    The US is a net importer… huge difference. The US is also a net importer of oil for its own consumption. Japan is a huge importer of oil but a lot of it is used to produce goods for US (or foreign) consumption.

    I could look at Argentina but the big difference there is that their currency tanked… not an issue for US as dollar = reserve currency.

    Look, you can keep on comparing to Japan if that makes you feel safe. I just don’t think the correlation is very strong.

  17. danm says:

    I agree Bruce. But it does make it in any way similar to the US situation.

  18. danm says:

    agree Bruce. But it does make it in any way similar to the US situation.
    Should have been: But it does NOT make it…

  19. SanFranHobo says:

    “The fed could wipe away deflation with the stroke of a pen.”

    Well then, someone tell the Fed that!

  20. Mr.Sparkle says:

    @Bruce – I believe that Japan’s population is more thrifty for the simple fact that they have to be. If I remember correctly, there is no practical equivalent of social security there and so they must save accordingly.

    I also recall that in the wake of the Nikkei collapse so much corruption came to light that most Japanese were happy to have their savings in 0.5% savings accounts rather than expose it to the churn ‘n’ burn policies of the major brokerages. I never realized how bad it had gotten until I read a chapter about it.

  21. Marcus Aurelius says:


    The Fed knows it, of course. They have options. They have opted for deflation by feeding those at the top. QE will not trickle down to the middle class.

  22. ottovbvs says:

    Marcus Aurelius Says:

    March 26th, 2009 at 9:53 am
    Yes. Really.

    ….In fact the absolute reverse is true….Obviously there are relative gainers and losers from inflation or deflation but as a general proposition the big winners from inflation are the owners of capital (providing it’s not cash) sometimes known as the entrenched interests…..I think you need 101 classes in economics as well as stoicism.

  23. franklin411 says:

    Inflation is great for debtors, which nearly everyone in the US is. You borrow, and you repay the loan in dollars that are worth less than the ones you borrowed.

    Deflation is horrible for debtors and great for the rich. You borrow, and you repay the loan in dollars tha are worth a lot more than the ones you borrowed.

    Give me inflation any day of the week!

  24. Marcus Aurelius says:

    franklin411 is correct.

  25. danm says:

    Inflation is great for debtors, which nearly everyone in the US is. You borrow, and you repay the loan in dollars that are worth less than the ones you borrowed.

    Deflation is horrible for debtors and great for the rich. You borrow, and you repay the loan in dollars tha are worth a lot more than the ones you borrowed.

    And since most of the wealth is owned by 55+ we can expect a lot of noise from this group.

    But many of them are wealthy with no debt (deflation good) and many of them are wealthy with leverage (inflation good).

    It’s a tug-of-war; who’s going to win?

  26. danm says:

    But the biggest debtor of all is US government (inflation good)…

  27. batmando says:

    “Give me inflation any day of the week!”
    So long as your wages go up at least at the same rate as inflation, yes?

  28. Marcus Aurelius says:


    That’s the problem with all of the bail out money going to the top – no increase in wages at the middle and bottom. If the “stimulus” (inflationary, by nature), had been applied to the general population, debts would be paid (to the banks, who could then, in turn, detoxify the crap they’ve created). But that’s not what is happening. The indebted – most of the middle and lower classes – will not be released from their debt. The system wants debt slavery – that’s why they are seeking to expand credit (increasing debt).

  29. batmando says:

    @Marcus Aurelius
    Agreed. The given is that there is a large wad of bad debt that has to be eaten by someone and the primary candidate from the get-go has been …. us, our children and theirs, who will pay for it through higher taxes for years and years and the hidden tax of inflation. In which case, I’d much rather see that gov’t remedies/monies be funneled through us to pay down debt or, if one has been prudent and not in debt, one’s share can go to increased consumption or investment. Any of the three courses of actions contributing to the economy as a whole while benefiting each of us directly.

  30. ottovbvs says:

    franklin411 Says:
    March 26th, 2009 at 10:50 am
    Deflation is horrible for debtors and great for the rich.

    …….Sure deflation is horrible for debtors who may or may not include the rich, who have had the capacity to lever themselves to a greater extent than anyone else, but this is only one part of the equation. The rich are also the owners of assets aka wealth. In a period of inflation they benefit disproportionately because salaries and wages are invariably racing to catch up with the increasing value of those assets while the big losers, those on fixed incomes, fall further behind. Ergo the owners of capital aka (according to MA) as the entrenched interests stand to benefit most from inflation and not the other way around as he was suggesting. Basically no one benefits much from deflation although there could be some improvements in the relative position of certain entrenched interests who have very secure jobs like tenured professors at Harvard, IRS employees, teachers, workers in state public works depts etc…..But Im sure those are not the “entrenched interests” MA had in mind when he claimed they would prefer deflation to inflation.

  31. jmcgowan says:

    @Mark E Hoffer
    I’m reading that the fed will sterilize by issuing its own securities. I hear that they are seeking approval to do so. But before that happens, I think we’ll be close to hyperinflation. Volker is standing in the wings to play the inflation slayer again. The fed can quickly mop up extra cash by selling its own securities. This time though as opposed to the 1930s, the fed will err on the side of inflation as opposed to deflation. Short long term treasuries.

  32. ottovbvs says:

    jmcgowan Says:
    March 26th, 2009 at 3:39 pm

    …..I hesitate to take a view on your scenario but if it depends on hyperinflation or even getting close to hyperinflation as you suggest then there are a couple of questions because the Fed can easily choke off inflation and will, long before hyper appears before inflation.

  33. jmcgowan says:

    Of course it’s just an opinion, an extreme one at that and I could be kooky wrong and I’d like to hear why it can’t happen but… If you read the tea leaves of comments by Bernanke, Kohn, Geithner, and Summers, one common theme is that the fed tightned too soon after loosening in 1933. Their tightening in 1937 stalled a beginning recovery and led to the so called “depression within a depression” in 1937 and 1938. They are determined to avoid this scenario again. They will allow inflation to take hold before tightening. Now the fed is buying US treasuries. This is printing money. If you go to the St. Louis Fed web site, you can look at the adjusted monetary base data series at the link below. If the series continues to go up like it has, I think very high inflation looks more likely. BTW, in such an environment, stocks will go up. Unemployment will remain stubbornly high. The monetary shock occurred in Q4 with a doubling of the monetary base. The effects on output will be felt a year later. The full inflation effect will be felt 2 years later. The fed can choke off inflation but the question is will it? I think the fed will be afraid of choking it too early. http://research.stlouisfed.org/fred2/series/BASE

  34. Pat G. says:

    “the Fed is sowing the seeds for big inflation”

    You betcha. And with $55T in unfunded Social Security and Medicare obligations just starting that debt is only going to get much worse. More heavy. Repudiation, anyone?

  35. jmcgowan Says: March 26th, 2009 at 3:39 pm


    thank you for your response. I share your, ultimately, dubious take on the future value of the USTreas complex, esp. the ‘long-end’..

    though, the idea that Volcker is waiting ‘in the wings’ to play ‘inflation-slayer’ should be, to me, re-thought..

    I think it’s more likely that he’s offering, merely, cover by providing the usage of his name..