“AGFLATION” COMING TO THE USA?
The hyperinflationists have been latching onto the huge jump in wheat prices to try to salvage their collapsing economic thesis of turmoil and demise based on rising prices. In a recent research report, however, Danske Bank describes why “agflation” will have an “insignifiant” impact in the USA:
“The fact that price rises have so far been contained to the wheat market suggests little imminent pressure on consumer prices. On the whole, we do not expect “agflation”, i.e. inflationary pressure induced by rising prices of agricultural products, to become a prevalent phenomenon within our forecast horizon.
The recent run-up in wheat prices will not lead us to change our current forecast for US consumer price inflation of 1.6% y/y in 2010 and 2011.
The impact on the CPI food index from the current “wheat price shock” will be a minor 0.3pp to the six month annualised inflation rate over the coming months as the shock feeds through to consumer prices with a lag. With the food index weighing just below 14% in the overall CPI index this means that the current spike in wheat prices will add a insignificant 0.04pp to our current estimate of annual headline CPI over the coming six months before fading away gradually.
In an alternative “agflation” scenario with a general increase in prices on agricultural products and a run-up in the overall CRB foodstuffs index, we would get a more significant impact on US CPI. Assuming an increase in the CRB foodstuff index of 30% over the coming three months followed by a levelling out, this would start to show up in the CPI food index in about six months. The peak effect of such a shock would occur in spring 2011 with a boost to annual consumer food price inflation of around 6pp. CPI food would then gradually return to the underlying trend by end 2011.
The overall impact on headline CPI in 2011 in an “agflation” scenario would be a boost of 0.5pp taking annual CPI to 2.1% for the year, which is still a relatively low inflation rate. With the Fed targeting primarily core inflation, we do not expect any monetary policy reaction to such a shock. On the contrary, a run-up in food inflation works as a tax increase for the consumer and risks pushing real private consumption lower dampening overall economic growth.”
Not even a record jump in wheat prices can put a dent in the deflationary trends….
nobody is arguing hyperinflation now, but 2-3 years down the road
after QE2, stimulus II, etc.
Yes, I am aware that you’ve all turned into deflationists now. But most of you are Johnny come latelys….Everyone was screaming about the inflationary impacts of QE1 and the other government measures. All that’s changed is the timeframe. The hyperinflation keeps getting pushed back. It’s become an absurd story of “if this, then this, then THIS!!!” Makes for great story telling and it sounds scary as hell, but in reality there is nothing that the government is doing that is terribly inflationary. And hyperinflation is beyond laughable. Sometimes I wonder if the inflationistas even know what hyperinflation is?
Sometimes I wonder if the inflationistas even know what hyperinflation is?
Well, I was going to repeatedly cut and paste “Weimar” and “Zimbabwe” in ALL CAPS throughout this website and go on at length about gold and (get ready for it) FIAT MONEY, as well as post links to my “Ode to Peter Schiff” music video (who is always right…except when he isn’t) on Youtube.
But then I woke up.
Are you saying I was hip before it was cool?
Agflation is price inflation. And that’s an EXTRA deflationary force.
Lol Just like deflationists have cried wolf since 2000 did ANYONE see ANYTHING deflated?
I only see dollar’s purchasing power deflated. Lol.
Let’s not cherry pick timeframes. Aside from a few perma-deflationists deflation has not been a mainstream perspective since 2000. The inflationistas all banded together in 2008 when they misunderstood what the Fed was doing. That is the timeframe of the inflation vs deflation debate and thus far it has been totally one sided.
But aren’t you arguing that there will be deflation if we don’t get more QE? Isn’t your deflation argument conditional also?
I have been saying that deflation is the risk (this is technically disinflation for now) regardless of what the Fed does. If the Treasury actually passed a stim pack 2 (of significance ~$1T or so) the I think we’d have to reconsider the deflationary position. I don’t see that happening.
What most people don’t understand about the Fed is that they don’t really create net new financial assets. For the most part the fed just swaps assets in and out with the private sector or makes loans. This is what the hyperinflationists have all missed. They view a program like QE as “money printing” which is entirely wrong. It’s just an asset swap. TARP was arguably a deflationary event because it now looks like the government actually stole profits from the private sector. Everyone cheerleading the fact that we will “make money” on TARP doesn’t recognize that we just took profits from the private sector (which is deflationary).
I am confused as to how the Fed purchasing a toxic asset at an inflated price only to sell it back at a deflated price can not lead to more dollars left in a system with inflated values.
In other words, how can the FED buy Toxic Assets (1Trillion+) with good money, then clean their balance sheet of these assets with out the loss showing up some where in the system AFTER full price has been paid.
You’re assuming the assets were all worthless. If we use today’s prices then it’s safe to say that the Fed made pretty smart purchases. Unfortunately, those were gains the private sector should have booked. Hence, the deflationary aspect of this whole procedure.
This is what I am assuming, I (FED) buy from You (Bank)a House for $200,000. Your balance sheet gets $200,000 credit and my balance sheet gets a house with a true market value of $160,000.
It appears that there is the chance of an extra $40,000 floating in the system now if I were to reclaim my liquidity from the market for this now less valuable asset.
What am I missing?
What am I missing?
The value of the underlying collateral (and by extension, the value of the loan) is not static. The Fed is pursuing a policy of asset stabilization and inflation that ultimately creates value for the asset.
Despite the hype, I believe that you will find over the course of time that the housing market in most sectors and locales in the US has bottomed. Those assets will increase in value as that stability becomes more apparent and we have extended periods of price appreciation.
Unlike a vulture venture, which would have a high profit motivation and a relatively short time horizon, the Fed can hold those assets for a long time, and does not need to price these loans for a quick, double-digit yield. Effectively, the Fed can pay above market value and get away with it. Being the largest treasury on earth does have its advantage.
One can debate whether that was the best policy choice available. (In my view, it wasn’t.) But the issue isn’t whether this was the best path, but whether it will work. I believe that you will see that it will.
The CS Monitor article actually gets a lot of it right (surprisingly, given the Mises reference), but blows it on the punch line. There’s no inflation problem because it is possible to prop up housing values without creating consumer price increases, which is what puts the “CP” in “CPI”. When the Fed raises rates, it will destroy money in the process, canceling out the inflation effect above the target rate. Inflation is a non-issue; the thing to hedge for is the possibility of inadequate growth, aka disinflation.
Here is an article that kinda sums up what I am trying to say/understand:
http://www.csmonitor.com/Money/Mises-Economics-Blog/2010/0804/Can-the-Fed-unload-its-toxic-assets-successfully
TPC, Please Opine.
Thanks
I’ll have a read later this evening and get back to you. Thanks.
Okay,
I had a read. That paper is based on a LOT of misconceptions. The first of which is the idea that the Fed is going to reduce the size of its balance sheet via sales. I think it’s VERY clear that they have no intention of doing that after the recent developments. So this conversation is kind of moot and based on the latest hyperinflationist theory of “if this, then this, then THIS”. which is nonsense.
First of all, the govt is projected to make a profit on TARP so I think it’s impossible to argue that the assets as a whole are worth less than they bought them for. Plus, most of the assets are essentially Fed backed. This takes us into the ridiculous govt solvency debate. Fannie isn’t bankrupt because the USA isn’t bankrupt. It’s an arm of the govt. So their bonds can’t be worthless.
Although much of the Fed’s purchases are likely to mature let’s just say they do sell some back to the public. This could in theory change the market price and would be inflationary. But that’s assuming the Fed sells it back at a premium to market price and would have to be calculated against any gains that the private sector already lost by giving up these assets. Based on the Fed’s own data they’ve already stolen the profits from the private sector so the inflationary impact is going to be negligible.
The interest on reserves debate is also incorrect because the payment of IOR is no different than issuing a CD to the banks. They could easily use their reserves to buy a bond from the Fed anyhow so it’s all really a moot point.
In other words, realistically, none of this is likely to be inflationary. The only thing that will b inflationary is if the lending markets actually start to ramp up and if that occurs then we have a full blown economic recovery on our hands and the last thing we’ll all be talking about is doom and gloom, but how to slow a booming economy….
Thanks TPC,
One question if you have a chance, can you point me to where I may find out more about the govt potential profit from TARP?
This reading from ELIZABETH WARREN (Chairman, TARP Oversight Panel) seems to say that the TARP funds have gone more to support other countries than the U.S.
http://www.npr.org/templates/story/story.php?storyId=129160871
So if these funds have left the country how does TARP/ FED get those funds back + a profit?
Thanks
Somebody should have sent this to BHP Billiton before they bid to purchase POT at a 30% premium this morning.