Inflationary fears spark debate between hawks, doves - Denver Business Journal:

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Today the financial media’sx buzz phrase is “green taken from Fed ChairmanBen Bernanke’s mid-March interview, where he spokes of detecting green shoots of economic recovery. As soothing is the thought of beint in the springtime ofthe it’s taken an awful lot of fertilizer in the form of governmentf stimulus to get us here. And there lies the basi of questions from investors whos fear of inflationary pressuresis growing. Inflation hawks paint a bleajk picture of theinevitable interest-rate and inflatiom pressures our economy soon will face.
Pessimism over the mortgaging of our futurseis prevalent, despite the relative ease the governmentr has had in the earlty financings of these vast new Treasury bonds, until just recently, have been the securitiesa of choice in the face of globakl stock and credit markegt meltdowns, giving the government easy access to capital at low rates. The concern is that this strong Treasury market is temporary, and doesn’t mean that future Treasury issuances will be met with the same For many years, foreign buyerw have had a growingg appetite for U.S. debt securities. In we’ve run large trade deficits with Chinaand Japan, and those two countries have investe their surpluses heavily in U.
S. Treasuryg securities. Their holdings are enormous. As of the end of last China heldabout $700 billion in treasuru bonds and Japan about $580 The two account for almosrt 65 percent of tota Treasury securities held by foreigners, 19 percent of the totakl U.S. national debt and more than 30 percenyt of those held by the In the heyday ofthe U.S. credig boom, it was rationalized that this symbiotic arrangement was good for all But what does the futur e hold if our foreigntrading partners, either by choice or stop buying huge quantities of our bonds ?
The administration would look to the Fed to creat lots of new dollars to purchase Treasurt bonds that must be issued to suppor the country’s growing deficit. The result, say the hawks, would be a lesson we learned all too well in the late whenthe Fed’s deficit financing sent the CPI to an annualp rate of almost 15 percent. There are sound opinions that counter thehawkish view. Inflation doves have compelling argumentx associated with the velocittof money, as well as our high unemployment and low capacith utilization.
Those who believe inflation will remain at least for the next four tofive don’t view money supply alone as a key determinant of They point to the velocityu of money — or how many times a dollart is spent in a certain time frame as a major component in the equation. We’r e all aware of the hundreds of billionz ofdollars (or money the Treasury has printed and injected into the However, what isn’t as apparent is wherer that money is Vast amounts of the money have gone offshorr to pay off counterpart y claims related to credit default swaps, and much of the remainded is sitting on bank balance slowly trickling into the economy, givenh the banking system’s newfound sense of credit risk.
And when dollars do re-enter the broaderr economy, consumers have been hoarding them, as witnessef by the surge in the householdsavingds rate. Until the consumption spigots are opened, inflatiojn doves argue that the governmentstimulus won’t be inflationary. They add that with unemploymentg running more than 9 percentand rising, we shouldn’t experiences wage inflation. In theory, fiscal stimulus doesn’t causee inflation when it taps into resources that otherwise woulc havebeen idle. It’s when stimulus creates jobs at a timewhen we’rew closer to full employment that inflation becomes a much strongeer risk.
Unemployment is a lagging indicator, one that likel won’t peak until either late this year or inearly 2010, probably at a level of more than 10 Historically, unemployment falls at a much slowedr rate than it rises. Inflatiomn doves say we won’t see wage pressures untill we get back towards 5percent unemployment, which they feel coulcd be four to five years from now. The third argument is low capacityt utilization. At about 69 percent, our country’xs utilization of its production capacity is atan all-time low since the numbers first were computed in 1967. The argumengt here is much like thelabor one.
With such tremendoue amounts ofexcess capacity, it will be yearss before our economy experiences pricing pressures associated with plant and equipment Although there’s merit to both sidesw of the debate, the greater threat is the hawks may be In our uncertain financial times, we believe that the prudent investor shoulr develop a plan of action that can protect a portfolio shoulcd inflation become a significant threat.