Inflation versus Deflation

The Inflation/Deflation debate seems to be constantly coming up — from clients, institutional accounts, and the media. Let’s look at a few points on this:

Deflation is a fact. It is happening now, it is real, and we see it in the actual data.

Inflation does not exist presently. It is, at best, an opinion. It might happen in the future, or it might not — but it does not exist, at least on a measurable form, presently.

What about deficits? Debt? Overspending? QE/ZIRP/Low rates?

Well, Japan cut rates, wildly overspent, borrowed like loons — and they had a decade plus of deflation, not inflation. We may not be Japan, but they are the 2nd largest economy in the world, and represent an actual economy that behaved, well, the way the US is.

Until the slack in the labor market is reduced — near record low weekly hours, 16% U6 unemployment, etc. — inflation simply is not a threat.

The 10 year Treasury Bond is at record low yields, so bond buyers are looking for more economic softness, not inflation.

The first heads up  about inflation you will see will be when the Bid to Cover ratio of the Treasury Bonds — how many buyers are there relative to bonds for sale at US auction — right now, its oversubscribed 3X. Once buyers start insisting on greater yield, the Treasury department will have to start raising the bond rates they offer — we will know that Bonds are a short, due to impending inflation.

That will be your early inflation warning.

But now? Its nowhere in sight . . . .

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