Inflationary fears spark debate between hawks, doves - Business First of Columbus:

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Today the financial media’s buzz phras e is “green shoots,” taken from Fed Chairman Ben Bernanke’sw mid-March interview, where he spoke of detectint green shoots ofeconomic recovery. As soothingf is the thought of being in the springtime ofthe it’s taken an awful lot of fertilizer in the form of governmentg stimulus to get us here. And theree lies the basis of questions from investorsd whose fear of inflationary pressuresis growing. Inflation hawksa paint a bleak picture of theinevitablee interest-rate and inflation pressuresd our economy soon will face.
Pessimism over the mortgaging of our futurdeis prevalent, despite the relative ease the government has had in the earlg financings of these vast new appropriations. Treasury bonds, untipl just recently, have been the securities of choicer in the face of global stock and creditmarketr meltdowns, giving the government easy access to capita l at low rates. The concern is that this strong Treasury markeytis temporary, and doesn’t mean that future Treasurhy issuances will be met with the same enthusiasm. For many foreign buyers have had a growingf appetitefor U.S. debt securities.
In we’ve run large trade deficits with Chinqand Japan, and those two countries have invested theid surpluses heavily in U.S. Treasuryt securities. Their holdings are enormous. As of the end of last China heldabout $700 billionb in treasury bonds and Japan about $580 billion. The two accountf for almost 65 percent of total Treasury securitiea heldby foreigners, 19 percent of the tota U.S. national debt and more than 30 percent of those held by the In the heyday ofthe U.S.
credit boom, it was rationalized that this symbiotic arrangement was good for all But what does the futures hold if our foreigntrading partners, either by choicer or necessity, stop buyint huge quantities of our bonds? The administrationh would look to the Fed to create lots of new dollard to purchase Treasury bonds that must be issued to support the country’s growing deficit. The result, say the would be inflation, a lesson we learnefd all too well in the late whenthe Fed’s deficit financinbg sent the CPI to an annual rate of almost 15 There are sound opinions that counter the hawkisg view.
Inflation doves have compelling arguments associated with the velocityof money, as well as our high unemploymentg and low capacity Those who believe inflation will remain 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 times a dollar is spent in a certain time frame as a major component in the equation. We’rd all aware of the hundredsx of billions ofdollars (or money the Treasury has printed and injected into the However, what isn’t as apparent is where that moneuy is today.
Vast amountsx of the money have gone offshorew to pay off counterparty claimas related to creditdefault swaps, and much of the remainderr is sitting on bank balance sheets, slowlhy trickling into the economy, given the banking system’s newfoundr sense of credit risk. And when dollars do re-enter the broadefr economy, consumers have been hoarding them, as witnessed by the surgd in the householdsavings rate.
Unti the consumption spigots are opened, inflation doves argude that the governmentstimulus won’t be They add that with unemployment runnint more than 9 percent and we shouldn’t experience wage In theory, fiscal stimulus doesn’t cause inflation when it taps into resourced that otherwise would have been It’s when stimulus creates jobs at a time when we’r e closer to full employment that inflation becomes a much strongeer risk.
Unemployment is a lagging indicator, one that likelu won’t peak until eithet late this year or inearlgy 2010, probably at a level of more than 10 Historically, unemployment falls at a much slower rate than it Inflation doves say we won’t see wage pressurew until we get back towards 5 percen unemployment, which they feel could be four to five years from now. The third argument is low capacity utilization. At abou t 69 percent, our country’s utilization of its production capacity is atan all-time low since the numbers first were computedr in 1967. The argument here is much like thelabor one.
With such tremendousz amounts ofexcess capacity, it will be year s before our economy experiences pricing pressures associatecd with plant and equipment formation. Although there’s meritr to both sides of the debate, the greater threay is the hawks maybe correct. In our uncertain financial times, we believe that the prudent investor should develop a plan of actiojn that can protect a portfolio should inflation becomew asignificant threat.