Morgan Stanley Food Inflation

MS_food

Zero hedge | Goldman Warns On The (Hyper)Inflationary Consequences Of A Successful QE2

Zero Hedge has an interesting article about Goldman's predictions of QE2.  Here are a few of the many highlights.

...the amount of currency in circulation will explode by over 300% from under $1 trillion to around $4 trillion.

Highlights from Goldman's Ed McKelvey:::

An increase in bank lending is not necessary for QE2 to boost growth.  This should be evident in the long list of channels under the asset price mechanism noted above, most of which do not necessarily involve bank lending (though it certainly helps).

If bank lending does increase, higher inflation is not necessarily an immediate consequence.  Some argue that by releasing the liquidity that the Fed has pumped into the banking system, most of which thus far has remained on deposit at the Fed, this would cause too much money to chase too few goods.  However, with utilization of spare labor and capital resources low, the first effects would be to support the stimuli to growth outlined above.

The obvious risk to this last point is if inflation expectations surge.  In a stronger growth environment than now prevails, such a surge could prove difficult to control.  It would require Fed officials to remove the liquidity quickly, which is why they will concentrate on purchases of Treasuries (easier to sell back into the market) and remind us continually of the tools they have developed to withdraw the liquidity (by periodically using them in small size).

Lower long-term real rates should stimulate various types of credit-sensitive spending, in particular:
 
a.     More housing demand.  This is the classic interest-sensitive sector, one that normally helps spur recovery from recession in the US economy.  Because of the large overhang of excess supply, this channel is unlikely to work well, but at the margin it would probably help at least some.
 
b.    More consumer demand for durable goods.  Without the oversupply that hangs over the housing market, this channel has more potential, though access to bank credit could be a problem for some borrowers.
 
c.     More capital spending.  Companies are sitting on a hoard of cash, which they can either invest in financial assets or in the physical (or human) capital with which they produce goods and services.  By reducing the real yields on financial assets, QE2 should encourage companies to redirect money to the more productive assets.  Again, this is at the margin, as utilization of existing capacity is low, but like foregoing channels it should help.
 
d.    More construction by state and local governments.  This is a credit-sensitive form of activity that many observers overlook.  However, since most such projects are financed by borrowing, they are sensitive to movements in interest rates.  As with the private-sector activity, it is hard to imagine large effects given how preoccupied these jurisdictions are with constraints on their operating budgets, but the same point applies—such activity may benefit at the margin.
 
e.     Refinancing of mortgages.  Although this is more properly thought of as facilitating the borrowers’ access to capital for spending of any sort rather than as credit-sensitive spending per se, there is no question that borrowers who have sufficient equity in their homes are benefiting from this.  Since QE2 first appeared on the radar in early August, the Mortgage Bankers Association’s index of refinancing applications has risen about 25%.  Unlike the heady days of mortgage equity withdrawal, borrowers are more likely to seek a reduction in monthly carrying expense than a wad of cash; even so, this will enable them to spend more than they might have otherwise.
 
2.     Higher equity prices.  As expectations of QE2 have pushed prices of longer-term bonds up and helped assuage concerns about a double dip recession, equity prices have soared.   Since late August, when Chairman Bernanke confirmed that some Fed action was likely, the S&P 500 Index has risen more than 12%, to a level that is about 5% above its early August readings.
 
Higher equity prices help economic activity in two ways:
 
a.     A positive wealth effect.  If households see their stock holdings rise in value, they are more apt to spend.  In the current circumstances, some would express this in terms of confidence that the Fed will do what it can to promote growth and keep the economy from sliding back into recession, but it amounts to the same thing.  At the margin, households will be more willing to open their pocket books even though the jobless rate remains high.
 
b.    A lower cost of equity capital.  When equity prices are high, companies are more likely to raise additional capital to expand their operations.  This obviously is subject to the same caveats as noted above for the effect of lower real rates on capital spending (via a similarly reduced cost of debt capital).
 
3.     A lower exchange rate.  The effects of QE2 on the dollar exchange rate get a lot of attention in the financial markets, but mostly in the form of fretting about the effect on foreign investors’ appetites for US-denominated assets, the risk of competitive “beggar-thy-neighbor” policies as other central banks or finance ministries seek to offset the appreciation of their currencies, and/or the ultimate effects on inflation.  While these concerns all have some degree of legitimacy, to the extent the dollar does depreciate it stimulates exports and steers some domestic demand away from imports toward domestically produced output.

September PPI pushed up by food and energy

Released on 10/14/2010 8:30:00 AM For Sep, 2010

Consensus Consensus Range Actual PPI - M/M change 0.1 % -0.1 % to 1.0 % 0.4 % PPI -Yr/Yr change     4.0 % PPI less food & energy - M/M change 0.1 % -0.4 % to 0.2 % 0.1 % PPI less food & energy - Yr/Yr change     1.5 %

Jeffrey Harding | Will America Have Hyper Inflation

Hyper Inflation

IMF Revising Growth Expectations / Currency Manipulation

The IMF is now expecting the US to grow at a slower pace than they predicted in July.  They are say ing 2010 is now 2.6% vs. 3.3% and 2011 is 2.3% vs the previous 2.9%.  They are attributing this to lower consumer spending than expected brought about by the high unemployment rate, home prices, tight credit and a desire to save more.

http://www.bloomberg.com/news/2010-10-06/imf-cuts-u-s-growth-estimates-as-consumer-spending-languishes.html

IMF also commented on the currency devaluation that is currently causing so much reaction in the markets.

http://www.reuters.com/article/idUSTRE6950OE20101006