Thursday, December 17, 2009

TIPS Derived Expected Inflation: About 2%

The spread between nominal 10-year treasuries (data) and 10-year TIPS (data) has increased to above 2% this week, up from almost 0% at the beginning of the year. But the current 211 basis point spread is still below the 250 basis point average during 2004, 2005, 2006, 2007 and the first half of 2008.  This measure of expected inflation (about 2%) is consistent with the market consensus inflation forecast from the latest WSJ survey of about 2% through the end of next year. 


At 12/17/2009 2:13 PM, Anonymous Junkyard_hawg1985 said...


Your chart reminds me of a previous discussion I saw concerning interest rates several years back. A group of 20 economists were asked to predict whether interest rates would rise or fall in the coming year. 19 of the 20 predicted they would increase. 95% of the economists were wrong. Interest rates have been a very poor predictor of inflation in years past.

At 12/17/2009 3:29 PM, Blogger PeakTrader said...

Even most pessimists underestimate the iceberg this country has been steered into, while optimists see a beacon of light.

We have a mountain of household debt, and the government's solution to deal with that debt is creating an even bigger mountain of government debt, through massive spending, while households mostly fend for themselves.

If we had a $5,000 per worker tax cut a year ago (or $750 billion for 150 million workers), high interest rate debt would be paid down, or paid off, increasing monthly income. Banks would be stronger, and demand would clear the market of excess assets and goods quickly, to increase production.

Fiscal policy should be helping monetary policy smooth-out business cycles by cutting taxes in a contraction and raising taxes in an expansion.

At 12/17/2009 5:22 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

We could wipe out payroll taxes on first $10k of wage income. I like that.

At 12/17/2009 9:56 PM, Anonymous Moses said...

Peak Trader, it gets worse than that. From 2005 to 2008, there has been $1.8 trillion in commercial real estate debt amassed. All of that debt is due to be refinanced beginning in 2010, but the financing doesn't exist. "Extend and pretend" will work for a few more months, but then the tidal wave of CRE defaults will hit as vacancy rates rise over the next two years.

This is the ticking time bomb which will blow up next. If Obama even recognizes the problem in time, he won't know which wire to cut. He'll use the only tool he knows how to use: government, to take over nearly $2T in ownership or control of private property.

500 banks will fail before this is over. Then in 2011 and 2012 we get hit with Alt-A recasts, if they don't walk away sooner. Strategic defaults are already rising.

By April you will be reading about the financial collapse of the FHA. Soon, the Pension Benefit Guarantee Corporation will go belly-up and need a bailout. Next year, more than half the states are going to need fresh bailouts to pay for unemployment benefits and to keep teachers and police employed.


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