George Melloan has an op-ed in the Wall Street Journal (HT: EPJ) with the following excerpts:
Why 'Stimulus' Will Mean Inflation
In a global downturn the Fed will have to print money to meet our obligations.
So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?
There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.
And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.
Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.
Adding to this analysis is recent data. Ten year Treasury rates are rebounding rapidly. From around 2% up to almost 3% in 6 weeks. The long term inflation outlook priced into the 5yr treasury/TIPS spread reveals that inflation expectations by the market have risen from almost -1% to +0.37% (at time of publish), again in about 6 weeks. Oil prices are slowly rising from low 30’s to low 40’s. Gold prices are rising as well.
Many have made a big deal about the astonishing growth in the money supply, but this has been offset by growing excess reserves held by banks. The banks were hoarding cash and not lending. However, the bi-weekly reports from the Fed show that excess reserves fell a little bit, meaning more of that massive money supply is getting into the market.
While rapid inflation isn't a sure thing from the data, I see nothing in the markets right now that predicts anything but growing doubts about deflation.