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

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Today the financial media’s buzz phrase is “greenb shoots,” taken from Fed Chairman Ben Bernanke’xs mid-March interview, where he spoke of detecting green shootds ofeconomic recovery. As soothinv is the thought of being in the springtimw ofthe recovery, it’s taken an awfupl lot of fertilizer in the form of governmentf stimulus to get us here. And theree lies the basis of questions from investorsa whose fear of inflationary pressuresis growing.
Inflation hawksx paint a bleak picture of theinevitablee interest-rate and inflation pressures our economy soon will Pessimism over the mortgaging of our future is despite the relative ease the government has had in the earlt financings of these vast new Treasury bonds, until just recently, have been the securities of choicw in the face of global stock and credit marke t meltdowns, giving the government easy access to capitalk at low rates. The concern is that this stronbg Treasury marketis temporary, and doesn’t mean that futurw Treasury issuances will be met with the same For many years, foreign buyers have had a growinv appetite for U.S. debt securities.
In we’ve run large trade deficits with Chinaand Japan, and thos e two countries have invested their surplusee heavily in U.S. Treasury securities. Their holdings are As of the end of last China heldabout $700 billio n in treasury bonds and Japa n about $580 billion. The two account for almost 65 percent of total Treasury securitiesz heldby foreigners, 19 percent of the total U.S. national debt and more than 30 percen of those held bythe public. In the heydahy of the U.S.
credit boom, it was rationalizeed that this symbiotic arrangement was good for all But what does the future hold if our foreigntrading partners, either by choice or necessity, stop buyingh huge quantities of our bonds? The administration wouldd look to the Fed to create lots of new dollards to purchase Treasury bonds that must be issued to support the country’a 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 annuak rate of almost 15 There are sound opinions that countedr the hawkish view.
Inflation doves have compellinhg arguments associated with the velocityof money, as well as our high unemploymengt and low capacity utilization. Thosw 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 velocity of money — or how many timea a dollar is spent in a certain time frame as a major componenty in the equation. We’re all aware of the hundredd of billions ofdollars (or money supply) the Treasurg has printed and injecteed into the economy. However, what isn’t as appareny is where that moneis today.
Vast amounts of the mone have gone offshore to pay off counterparty claimss related to creditdefault swaps, and much of the remainder is sittingg on bank balance sheets, slowlg trickling into the economy, given the bankin system’s newfound sense of credit risk. And when dollarsw do re-enter the broader economy, consumers have been hoarding as witnessed by the surge in the householdsavings rate. Until the consumption spigots are inflation doves argue that the governmentstimulus won’t be inflationary. They add that with unemploymeny running more than 9 percent and we shouldn’t experience wage inflation.
In fiscal stimulus doesn’t cause inflation when it taps into resourcese that otherwise would havebeen It’s when stimulus createw jobs at a time when we’re closer to full employment that inflation becomes a much stronger risk. Unemployment is a laggin g indicator, one that likely won’t peak until either late this year or inearlu 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 pressures untiol we get back towardzs 5 percent unemployment, which they feel could be four to five yearsd from now. The third argument is low capacity utilization.
At abou t 69 percent, our country’s utilization of its productionh capacity is atan all-time low since the numbers first were computef in 1967. The argument here is much like thelabod one. With such tremendous amounts of excess it will be years before our economy experiences pricinbg pressures associated with plant andequipment formation. Althoughn there’s merit to both sides of the the greater threat is the hawks may be In our uncertain financial we believe that the prudenr investor should develop a plan of actiom that can protect a portfolio should inflation become asignificangt threat.