So who knew that along with religion and politics the other thing not to bring up in polite conversation was inflation. It can get heated. Of course on Dkos everyone knows to steer clear of these sorts of topics that can caused heated debate. Regardless, I'll press on. Quite a week.
In these diaries I've been mentioning how the unprecedented bailouts that have gone on around the world courtesy of central banks are putting us in uncharted territory. Well, that is all ancient history because this week we saw another trillion dollars thrown in the mix. The initial talking points told you that this was a good thing and nothing to worry about.
That didn't last long. More members of the Fed are starting to talk about inflation. This week Bullard mentioned it could be a problem in a few years. Of course it is nothing to worry about today according to Bullardbut he just wanted to take the time to point out it could be a problem in the future (hint: the best time to prepare for these sort of things is a few years in advance. extra hint: the only people who really know what is going on with all the funny money are the people at the Fed)
Federal Reserve Bank of St. Louis President James Bullard said the U.S. may face higher inflation in a few years unless central bankers make the right policy choices.
"For now, inflation remains low," he said during a speech in Nashville, Tennessee. Even so, "we could face an inflation problem a couple years down the line if we don’t make the right moves policy-wise. For now, we’re in good shape
Joining Bullard was the man who runs the largest Bond fund in the world. El Erian from Pimco.
Although price pressures in the U.S. economy are currently muted, inflation could accelerate in the United States in the next three to five years, the world’s biggest bond fund management company said on Thursday.
So, they are giving you a heads up. All of this money flowing to the banks is going to have an impact beyond just the record setting bonuses.
A few people got a bit spooked regarding the situation across the pond this week. England has an inflation issue.
But Steve Barrow, a currency analyst at Standard Bank in London, worries that Mr. King is being incautious. "The sovereign debt crisis has left (the Bank) nervous and, seemingly, prepared to continue to ignore overshooting inflation," he says. "There’s still a slight sense here that the Bank could be playing a bit fast and loose with inflation."
Economists at Credit Suisse are also skeptical. "Since the start of last year, the (Bank of England’s monetary policy committee) has been consistently surprised by the strength of inflation – a year ago, it expected inflation to be below 1% now," they said. "Investors might be well advised to take out inflation protection in the U.K."
There are two important points in the above section. The first is the "consistently surprised" language. The most popular word in stories about inflation is "surprise". Latin America has been full of such surprises in 2010. India has also been "surprised" by their double digit inflation. China recently got a "surprise" regarding their inflation. Inflation likes to just show up unannounced at your party sometimes. Keep that in mind when you see members of the Fed saying inflation may be an issue at some point in the future.
The second point is that some central bankers will "continue to ignore overshooting inflation". Central bankers are in a bit of a bind. Important people don't want anyone to raise rates. Why? Well you may have heard that the biggest four banks in the US all made money on their trading EVERY DAY of the last quarter. How can they do this? An important part is that they borrow money from the Fed at zero percent interest. If you were a bank you would also want this to continue for quite some time. So there might be some pressure on central bankers to make it so.
Now this is usually the point where people say that I'm just some know nothing blogger with my tin foil hat making shit up. So lets get a quote from someone close to a central bank.
European Central Bank executive board member Juergen Stark said today that central banks worldwide are likely to come under increasing political pressure, but the ECB would resist any pressure to allow higher inflation.
"On the ECB board, we are a very convinced band which will resist political pressure," he told Deutschlandfunk radio. "However, increased political pressure could come from other areas of the world so that globally, central banks could have difficulties."
So central banks may be under pressure to keep rates low. And we know that the US central bank has promised low rates for a long time. It certainly looks like we are setting up for some real inflation like the kind many other large economies are currently experiencing (See China, India and Brazil). Now some people still think that what happens in those countries doesn't impact the people in the USA despite pretty much everything we buy being made in those countries and all the money we use to buy those things being loaned to us by those countries. This week there was actually a news story in media saying that Chinese inflation might impact the US.
Inflation is picking up in China, sparking U.S. concerns that reining in growth there could have negative consequences here.
Some fear that a pullback in China’s overheated economy could hurt markets here, by cutting Chinese investment in U.S. stocks and Treasurys. And the higher inflation reading, coupled with 12% annual economic growth rate in the first quarter, is setting off alarm bells around the world.
Now if China's inflation causes their economy to crash then that could trigger another worldwide recession. Then inflation won't be an issue in the short term. But, if central banks just keep handing out free money to bankers (trillion here, trillion there), than perhaps they can keep the next recession at bay for a while. If they do, inflation will be surprising many people.