Trend #2. Inflation becomes a focus, interest rate policy to change in 2010.
Some economists and journal reporters will write that interest rate policy will change this year because our economy is growing again. Well, partly true. Inflation is a bad word, because nobody thinks yelling “fire” in a crowded theater is a good idea. Inflation is a self fulfilling prophecy, once the flood gates are open, saving becomes a past time. Hugo Chavez’ bolivar devaluation is a case in point- Venezuelan’s have “buy now!!” fever.
Cloudy monetary policy keeps the public safe and allows them to continue watching the show, without fear of needing to rid their personal balance sheets of dollars because they are effectively worth less than a few years ago, and to keep prices from skyrocketing because of a run on Best-Buy. The fact that the Fed’s balance sheet has ballooned to levels not seen since the great depression, and since our budget deficit has hit 12% of GDP, rate hikes are inevitable. “Cloudy” monetary policy is the idea that “quantitative easing”, as the term is used by the Fed, clouds the fact that it’s very actions are inflationary. We are simply spending now, excuse me, printing money now and asking questions later. When the printing press stops, that trip to the theater may cost you more than it’s worth.
Bill Gross:
“Explaining the current state of global fiscal affairs is often confusing – it’s much like Robert Palmer’s 1980s classic song where he laments that “She’s so fine, there’s no telling where the money went!” Where government spending has gone is not always clear, but one thing is certain: public debt is soaring and most of it has come from G7 countries intent on stimulating their respective economies. Over the past two years their sovereign debt has climbed by roughly 20% of respective GDPs, yet that is not the full story. Some of governments’ mystery money showed up in sovereign budgets funded by debt sold to investors, but more of it showed up on central bank balance sheets as a result of check writing that required no money at all. The latter was 2009’s global innovation known as “quantitative easing,” where central banks and fiscal agents bought Treasuries, Gilts, and Euroland corporate “covered” bonds approaching two trillion dollars. It was the least understood, most surreptitious government bailout of all, far exceeding the U.S. TARP in magnitude. In the process, as shown in Chart 1, the Fed and the Bank of England (BOE) alone expanded their balance sheets (bought and guaranteed bonds) up to depressionary 1930s levels of nearly 20% of GDP. Theoretically, this could go on for some time, but the check writing is ultimately inflationary and central bankers don’t like to get saddled with collateral such as 30-year mortgages that reduce their maneuverability and represent potential maturity mismatches if interest rates go up. So if something can’t keep going, it stops – to paraphrase Herbert Stein – and 2010 will likely witness an attempted exit by the Fed at the end of March, and perhaps even the BOE later in the year.”
