Is Inflation Dead?

Recent reports indicate the dreaded inflation monster has been slayed. Is that truly the case? If the monster has been slayed, is another monster lurking in the weeds, that is the larger monster that embodies economic death known as deflation?

Sense on Cents has debated this topic more than a handful of times over the last year. The mere fact that the topic has been on our front burner is a strong indication that we are not experiencing cyclical developments and changes within our economy, but rather large, structural changes.

Will these trends continue? Will the disinflationary momentum increase to the point where our economy actually enters a period of deflation? Bloomberg addresses the trends of this critically important topic as the economy moves from inflationary to disinflationary in writing, Bond Traders Declare Inflation Dead After Yields Fall:

“The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy,” said Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.

Is inflation dead? Are prices merely stable? Or, is there something more sinister and potentially damaging at work? What might that be? Disinflation trending toward deflationBloomberg touches on this reality:

Federal Reserve Bank of Atlanta President Dennis Lockhart said in an April 15 speech that he is paying “serious attention” to disinflationary pressures. The “moderation in inflation has been broadly based,” Fed Chairman Ben S. Bernanke said a day earlier in testimony to Congress.

“Activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as fiscal fragilities have come to the fore,” the IMF said in the report.

Bond investors are focusing on those “fragilities.” Government debt as measured by Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index has returned 1.35 percent on average this year, compared with 0.9 percent in all of 2009.

“There’s a philosophical battle between those — and I’m in this camp — who feel the deflationary forces are very powerful, versus those who say ‘hey, you’re printing tons of money, you’ve got to have inflation,’” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $72 billion in fixed-income assets. “And they’re right, too. The big question is timing.”

We are now two plus years into the heart of our economic crisis. The deleveraging forces underlying our economy are still very much in place, but they are being neutralized by the stimulative forces provided by the accomodative monetary and fiscal policies provided by global governments.

The battle between these major forces has yet to fully play out. In fact, given the fact these are truly structural forces at work, do not expect that they will be resolved anytime soon.

Navigate accordingly and remain on guard as the dangers of an overall fragile system remain.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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