Inflation on The Way ? Not Till Unemployment Falls by 50% ....anId unfortunately that is not in the cards for the forseeable future

 see above (I got this from Krugman's blog... you can argue policy but numbers dont lie)

You dont get inflation with no increase in wages(and note the average hourly earnings number here is not inflation adjusted) as you can see in the attached chart....and with 10%+ undemployment (more like 16% + if you add in discouraged and underemployed) we are far from a situtation where employers have to raise wages to attract/retain workers. That and the extremely low velocity of money makes high levels of inflation an unlikely consequence of QE 2. Unemployment would have to drop by at least half before one could anticipate any significant wage pressure and absent the increases in labor costs the inflation risks are low as the chart shows.

More later on fed policy but for now let's observe that this prescription from Fed Governor Warsh in today's WSJ for policies to get the economy out of the doldrums:

Pro-growth policies include reform of the tax code to make it simpler, more transparent and more conducive to long-term investment. These policies also include real regulatory reform so that firms—financial and otherwise—know the rules, and then succeed or fail. Regulators should be hostile to rent-seeking by the established, and hospitable to the companies whose names we do not know. Finally, the creep of trade protectionism is anathema to pro-growth policies. The U.S. should signal to the world that it is ready to resume leadership on trade.

is like prescribing a garden hose to put out a forest fire.

Despite all the talking heads screaming hyperinflation ( I have one in my ear right now on CNBC) and buying gold I dont think my view is actually in the minority. In fact a forecast of moderate inflation is exactly what is being shown in the treasury bond market:

Here are the market yields in the treasury market where one can take a position directly on future inflation :
                                             
                                               5 year             10 year       20 year

conventional treasuries             1.17               2.66              3.66
tips(infl protected bond)          -.34                 .49                1.18

implied inflation forecast           .83                  2.17              2.48   

as the economist writes in the buttonwood column this week:(the graph appears there as well) You might also find it interesting to compare the grey line in this chart which shows market inflation expectation with the chart at the top of the page that shows actual inflation.

If you compare the yield on conventional bonds with the yield on the index-linked Treasury bond that matures in 2028, the result is an implied inflation rate of 2.4%. That hardly sounds like the Weimar Republic.

Despite all the talking heads screaming hyperinflation ( I have one in my ear right now on CNBC) and buying gold I dont think my view is actually in the minority. In fact a forecast of moderate inflation is exactly what is being shown in the treasury bond market:


Here are the market yields in the treasury market where one can take a position directly on future inflation :
                                             
                                               5 year             10 year       20 year



conventional treasuries             1.17               2.66              3.66
tips(infl protected bond)          -.34                 .49                1.18


implied inflation forecast           .83                  2.17              2.48   

as the economist writes in the buttonwood column this week:(the graph appears there as well) You might also find it interesting to compare the grey line in this chart which shows market inflation expectation with the chart at the top of the page that shows actual inflation.

If you compare the yield on conventional bonds with the yield on the index-linked Treasury bond that matures in 2028, the result is an implied inflation rate of 2.4%. That hardly sounds like the Weimar Republic.

as for all those folk running into gold including  $ billions  from retail investors many taking their advice form screamers on tv and radio ?  The economist column observes:

So why is gold, a classic anti-inflation hedge, still doing so well? The answer to this enduring puzzle may lie in the level of real interest rates. As Chris Watling of Longview Economics points out, gold’s last great bull run was in the 1970s, when real yields were negative. Positive real rates in the 1980s and 1990s had bullion trading sideways for 20 years. In a world of negative yields, owning gold has no opportunity cost.

To follow the logic through: if/when inflation goes up investors will demand higher real yields in the bond market to compensate themselves for the nascent inflation. As real interest rates adjust to take account of this the opportunity cost of owning gold will go up and gold will at a minimum cease to go up. Given the massive flows into gold including leveraged plays I would say "cease to go up" would be a massive understatement. In other words should inflation actually emerge gold  would be exactly the wrong position. Even worse would be a position in long term nominatl bonds established at current levels. Higher actual inflation could likely be bad for both bonds and for gold.

The massive flows into bonds and gold strike me as classic cases of  retail "dumb money" with retail investors invariably buying high and selling low. An excellent academic paper on the evidence of the "dumb money" phenomenon among investors in US stock mutual funds can be found here




I put that into the category of "dumb money" (check this great academic article on the phenomenon of retail investors as "dumb money")






one last observation...as anyone who questions gold knows one prediction always comes true....the gold bugs will soon inhabit the comments section here.