Thursday, August 18, 2011

Inflation Expectations Falling?

Inflation Expectations Falling, Will Narayana Kocherlakota Admit He Was Wrong?

Something isn't computing out there.  On the one hand, gold is rising, which is indicative of rising inflation expectations.  On the other hand, bond yields are dropping in expectation of recession and possible deflation.  These two scenarios don't go together.  One or the other must yield.

Haven't these people read any history?  In the late seventies, gold went on a tear which resulted at the time in a price that seemed impossible to breach- until these last few years.  Now the price is over twice that and rising.  This is indicative of something, wouldn't you think?

Back then, we had inflation as well as recession.  It was called "stagflation".  It wasn't supposed to happen according to Keynesian economic theory, but it did.  Is history repeating itself?

By the way, bond yields didn't stay low back then.  They rose, as they will in the present, once this misconception gets settled.  Because back then, not even the government had seen fit to do "quantitative easing".  Yet, this same policy allows some people to delude themselves that the market is strong for US Debt.

If it is, it is only because foreign governments want to protect the dollar in order to protect their markets. Also, the US government is buying its own debt.  This is distorting the market and must come to an end at some point.

The bond market may crash as it is in a bubble.   If, by any chance the deflationists are right, gold must go down.  This seems inconceivable given the policy of the Fed and other central banks.  It is also inconsistent with history, as all fiat currencies fail.

As for me, I would never, ever, ever, buy any bonds.  That's for suckers.

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