Thursday, April 02, 2009

Is Inflation a Problem?

Over the past 6 months, the US government has been pumping liquidity and new cash into the economy. In the 4th Quarter of 2008, consumer prices were deflationary which reflects the drop in demand as shown in the 4Q GDP growth rate of -6.4%.

So here is the issue, at what point will inflation become a problem?

Obviously, there are many other people out there who understand these issues better than me. All I need to know is what to look for to see when inflation comes back.

First, what is the fed doing with the fed funds rate? They have it at 0% to .25%. There is no where to go but up. When they start to raise this rate, it means they are trying to slow the growth rate (demand) and control inflation.

Second, what is the 10 Year Treasury doing? Right now, it is yielding around 2.6%. When the yield gets back above 3.5% and stays there, you can expect more normal inflation to return. It will jump everytime the Treasury prints money but it is the longer term that I am interested in.

Finally, what are the commodities doing. We cannot avoid inflation if oil gets too high. Right now it is in the $45-$55 trading range. If you see this get up into the $60-$70 range, then that will move into the rest of the economy and push up core consumer prices.

I look at inflation for a number of issues:

1. I have lots of money borrowed at Prime + which is tied to the fed funds rate and therefore, tied to inflation.

2. I own lots of commercial land. I need that land to keep increasing in value over the long haul for my equity to grow.

3. Finally, inflation will let me know how the overall economy is looking. (Except in the case of stagflation where the economy stalls and inflation spirals up.)

1 comment:

hrdk said...

sorry to reply you almost after a year you posted the blog. i just saw it. it's been a year so you would have much better idea about the inflation. hence we still have the same question. it hasn't been solved yet. And as far as i think (it's just my opinion) they have to come up with new ideology. basically they need to change the financial constitution which we have right now. they are in the trap and there is no other way to come out of that, the only thing is possible new policies to be made. it's just simple story about inflation is , it's just affect the middle class and low income people, about 75% of population, and we need to protect them by using fiscal , monetary policies and try to wound those 25%. because there is no other option left. and there is nothing wrong to do so because those are the people who made significantly big bucks during crisis. simply they took the money from 75% people during crisis and become extremely rich, now their turn to give away some to simulate the economy. if they don't all 100% will be in deep trouble. and i am pretty sure Mr. bernanke is way smarter to imply this in real world.