Inflation Not A Concern For Now?

The markets surged to multi-year highs on Thursday after the Federal Reserve announced an aggressive plan to stimulate the economy, encouraging investors to dive back into the market.  In a significant shift in monetary policy, the Fed said it would buy $40 Billion of agency mortgage debt per month and pledged to maintain it until the U.S. unemployment rate, currently at 8.1 percent, significantly improves. 

Fed Chairman Ben Bernanke told reporters, “The employment situation remains a grave concern and while the economy appears to be on a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate."  Bernanke also stated, “that the battle against unemployment eclipses any concerns about inflation for now.” In an additional move that reflects just how concerned Fed officials are about the economy, officials said they were not likely to raise interest rates from near zero until at least mid-2015. Previously, it had set such guidance at late 2014.

Hypothetically speaking let’s say that the unemployment rate does not “significantly improve” for another 12 months.  That would mean another $480 Billion in IOUs granted by the Fed in addition to the $16 Trillion debt the US government already has. 

While much emphasis has been placed on the sovereign debt crisis in Spain and Greece, the fact is the United States is not in much better financial shape than the Euro Zone.   As highlighted in a speech to the Bundestag lower house of parliament to open a debate on the 2013 German budget, German Finance Minister Wolfgang Schaeuble said worries about U.S. debt were a burden for the global economy, hitting back at Washington which has criticized Europe for failing to get a grip on its own debt crisis.

According to a CNBC report on the World’s Biggest Debtor Nations measuring sovereign external debt as a percentage of GDP; the United States ranks 20^th, only slightly ahead of Spain #14 and Greece #15.  However, when looking at debt independent of GDP the United States’ debt of $16 Trillion far exceeds that of Spain ($2 Trillion) and Greece ($546 Billion).   http://www.cnbc.com/id/30308959/The_World_s_Biggest_Debtor_Nations?slide=2

 

The crux of the situation is that the United States is likely to hit the $16.4 trillion borrowing limit by the end of the year.  Essentially QE3 was the last bullet in the FED gun.  During the recession, the private sector got lean and mean, achieving greater productivity with fewer workers.   This resulted in cash heavy balance sheets for many private sector companies, leaving little incentive for them to go a dramatic hiring spree that would “significantly reduce the unemployment rate.” Thus, many of the private sector domestic jobs lost are not coming back.  Meanwhile drops in the unemployment rate were attributed more to people completely dropping out of the labor force as opposed to finding work.

It is unsustainable for the Government to be the nation’s largest employer.  Without significant private sector job growth there will be no housing recovery.  A recovery in housing is further stagnated by the loss of the sub-prime mortgage industry, as mortgages are now often unattainable for those who would like to purchase.

Given these circumstances, the recent market surges will be temporary and short lived especially if long term recovery is hinged on housing, which is in turn dependant on lower unemployment.  At the same time, ballooning Government debt continues to drag down the value of the dollar and causing commodity prices to rise. 

So when Mr. Bernanke says that inflation is not a concern now, perhaps someone should ask him when was the last time that he went to the gas station or supermarket, because to me $3.87 per gallon for gas is very concerning.  #HELLOINFLATION.