Lacy Hunt at Hoisington Investment has been worried about soaring debt and disinflation (declining inflation) and deflation (sustained falling prices) since the 1990s. He still is. From his latest quarterly economic analysis, written with Van Hoisington:

While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern, therefore we remain fully committed to the long end of the Treasury bond market.

These guys have made very smart bets for years now by owning 30-year Treasuries and zero-coupon Treasuries. Many investors have avoided long Treasuries because they're worried about inflation, settling instead for miserably low short-term coupons. But the Hoisington bet against inflation has been exactly right, and their shareholders have done very well. Hunt and Hoisington don't seem especially worried that the debt-ceiling argument (possible near-term defaults, downgrades of Treasuries) will hurt their investments, either.

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Categories: Inflation/Deflation
        

And WBAL's Bill Vanko and I talk about it on the radio here.

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The Planter's trail mix in the company vending machine just went from 75 cents to 85 cents. The Payday bars went from $1 to $1.20.

No, I'm not one of those predicting a new Weimar Germany, this column notwithstanding. But wholesale ag-commodity prices are bleeding into retail. The cafeteria just raised coffee prices, too.

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Categories: Inflation/Deflation
        

There has been a growing sentiment among the gnomes -- I'm talking since about 2002 -- that a moderate amount of inflation is a good thing. Krugman, who Saturday said, "yes, let's have more inflation," gives the idea its latest voice. Inflation gives companies leeway to raise prices and make nominal profits, the thinking goes. Because inflation is associated with higher interest rates, it gives central bankers room to cut short-term rates to stimulate the economy when it slumps. Inflation of 4 percent would give the economy a decent cushion against the dangers of deflation -- broadly, persistently declining consumer prices.

And, although few will come right out and say this, inflation would be a politically painless way for debt-drunk governments to pay off their creditors. The United States, for example, could use inflated, depreciated dollars to pay off old debts without raising taxes.

But here is the question that nobody has answered, as far as I can see: How do you create consumer price inflation without fueling another bubble? Thanks to overcapacity of productive and consumable stuff, thanks to fierce global price competition, inflation is dead. When the Federal Reserve and other central banks create liquidity these days, it doesn't go into consumer prices. It fuels bubbles in Internet stocks, houses and other assets.

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Daniel Gross addresses the debate over what rising interest rates and plunging Treasury-note/bond prices (ignore the Slate headline reference to "bills." It's long-term debt we're talking about) are telling us. Are they the market's panicked response to all the deficit spending in DC? Or are they a relieved return to normality?

Gross correctly limns the suspect motivations and arguments of those who say Treasuries are "discounting" inflation apocalypse. And he notes that Treasury yields were ridiculously low in December because the financial world was falling apart and U.S. debt was the only safe port. Looked at in a historic time series, today's Treasury yields look perfectly normal. Investors are responding to a strengthening economy and not impending doom.

But what about gold? I'm the first to say that Gross's deprecation of the market as an intelligent discounting machine -- markets resemble "the Star Wars bar scene more than they do the economics faculty lounge at Princeton," he says -- applies equally to gold investors. But it's difficult to argue that the price of gold, a traditional if unreliable inflation hedge, is well within a historical range. It's near $1,000 and all-time highs, although it has lost steam over the last couple of days. Gold investors seem to be worried about something.

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The price of a first-class stamp for a one-ounce letter hit 44 cents this week, up from the 42-cent mark reached just a year ago. Over the long and short runs, postage costs have increased substantially faster than general prices. In the last 40 years, the cost of a stamp rose at an average annual rate of 5.1 percent, whereas inflation was only 4.5 percent a year, on average.

In the last eight years stamp prices rose at an annual average rate of 3.3 percent. Inflation over the same period was only 2.3 percent per year, on average. If USPS costs had been limited to the increase in the consumer price index since 1969, a stamp today would cost 35 cents, not 44 cents. Still, says the Associated Press:

Even so, the rate increase is unlikely to cover the ongoing losses and the possibility remains that the post office could run out of money before the end of the fiscal year.

The post office could have cited extraordinary circumstances and asked the independent Postal Regulatory Commission for larger increases, but officials worried that would only result in a greater decline in mail volume and worse losses.

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The consumer price stats came out from the Labor Department, showing a slight (0.1) percent decrease from February's levels. Overall prices have been flatlining or declining since last fall, when the bottom fell out of the economy. Much of the decline has been driven by energy, which we all know about. Gas is $2 a gallon; last summer it was $4.

But food prices have also been falling, as can be seen in numerous deals at the grocery store. Food prices dipped 0.1 percent in March for the second month in a row. The last time food prices fell in two consecutive months was in 1992, as the economy recovered from a recession.

As with most economic changes, lower food prices are good news and bad news. They'll help families with squeezed incomes. But they'll probably mean lower profits for farmers and grocery stores, and falling prices signal overall economic weakness.

Posted by Jay Hancock at 11:18 AM | Permalink | Comments (0)
Categories: Inflation/Deflation