Friday, January 08, 2010

Jeremy Siegel, Another Inflation Skeptic

The evidence is building that the world economy is headed for a substantial recovery from the worst financial crisis since the Great Depression.

While pessimists see either another downturn or rapid inflation ahead, I believe neither will occur. The Federal Reserve has taken the proper measures to promote a stable economic recovery. Pessimists claim that the surge in Federal Reserve credit and government debt will cause economic misery by sparking the opposite problem: rapid inflation.

I don’t think so. I believe that the Fed has a plan to withdraw liquidity when the economy recovers and lending increases. This will require that the Fed raise interest rates, probably sooner than the market now anticipates. But just as Bernanke understands that the central bank can prevent a depression, he understands that the central bank is also the principal source of inflation and will act to prevent it. Barack Obama’s administration may not like it, but the Fed will raise interest rates, nudging the fiscal authorities to get their house in order and reduce the deficit.

The world is now inextricably bound by a global financial market and interlocking trade flows. All indications are that the world economy has successfully dodged the depression bullet, and I believe economic activity will surprise on the upside. This means stronger than expected stock returns and weaker than expected bond returns. In spite of the criticisms, our central bank has acted properly to deflect the panic and promote the recovery.

~Jeremy Siegel, professor of finance at The Wharton School


At 1/08/2010 3:25 PM, Blogger PeakTrader said...

Not enough money chasing too many goods isn't inflationary:

Contrarian Investor Sees Economic Crash in China
New York Times
January 7, 2010

SHANGHAI — James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.

“In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”

“The Chinese,” he warned in an interview in November with, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”

Mr. Chanos grew up in Milwaukee, one of three sons born to the owners of a chain of dry cleaners. At Yale, he was a pre-med student before switching to economics because of what he described as a passionate interest in the way markets operate.

After college, he went to Wall Street, where he worked at a series of brokerage houses before starting his own firm in 1985, out of what he later said was frustration with the way Wall Street brokers promoted stocks.

For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.

At 1/08/2010 8:29 PM, Anonymous Anonymous said...

Well, if Seigel is right, we should see stable or falling prices...If not, Katy bar the door....So far, I've seen nothing but rising prices despite high unemployment and low economic activity.

At 1/08/2010 10:23 PM, Blogger VangelV said...

Let me get this straight. The Fed keeps printing. The feds keep running huge deficits. Fannie and Freddie keep lending to people that can't afford the homes that they mortgage. The states and municipalities keep hiring employees and make pension promises that they cannot afford to keep. Between the new borrowing required to fund the deficits and the short term bonds that need to be rolled over there is around $3 trillion of cash needed. Yet the USD is supposed to go up in value?

Sorry folks but while the USD is due for a counter-trend rebound the long term trend towards a loss of purchasing power will still stay intact. I would still hedge my bets and load up with gold. If the economy collapses gold should do well and purchasing power will rise. If we get a high inflation rate as foreigners refuse to lend to the US government and the bonds are purchased by newly printed cash that is created out of thin air it will also do well.

Frankly, the record of fiat currencies is not a good one and holding cash or bonds is too dangerous at this time.

At 1/09/2010 12:21 AM, Blogger bobble said...

the money supply is controlled by bank lending.

bank lending has collapsed.

this is a much more serious financial trainwreck than people realize.

At 1/09/2010 3:30 AM, Blogger PeakTrader said...

The value of the dollar is relative to other currencies. Japan had a monetary quantitative easing and massive fiscal spending (where its debt to GDP ratio rose to second in the world after Zimbabwe). Yet, its inflation rate was slightly more than zero, while the yen appreciated.

Consumer borrowing falls sharply in November
By Martin Crutsinger, AP Economics Writer January 8, 2010

WASHINGTON (AP) -- Americans borrowed less for a 10th consecutive month in November with total credit and borrowing on credit cards falling by the largest amounts on records going back nearly seven decades.

Even consumers who would like to increase their borrowing are finding it hard to get credit at banks. Many banks, hit by the worst financial crisis since the 1930s, have tightened lending standards.

"With consumers facing difficult labor market conditions and tight credit conditions, downward pressures on credit are likely to remain strong and improvements will be very gradual," Gregory Daco, an economist at IHS Global Insight, wrote in a research note.

The drop in overall credit for 10 straight months was a record in terms of consecutive declines, surpassing the old mark of seven straight declines set in 1943 and again in 1991.

Borrowing in the category that includes credit cards has fallen for 14 straight months, also a record.


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