Can you see a ghost? I can if we are talking about inflation, and I am. For about two years now, and following the unprecedented money printing the Fed has been doing, some have been adamant that inflation is not a problem nor would it be because the Fed has a "plan" to drain out all, or most, of the liquidity it pumped into the economy. Even today with gold at around $1,350 some still refuse to acknowledge that inflation is even a possibility. Really!!! tell that to the rioters in India and Bangladesh. Tell that to the Tunisian people who toppled a well entrenched dictator because food prices are rising fast. Convince the Egyptians, whose government may fall before these lines are finished, that price increases are a figment of their imagination. Inflation is spreading throughout the world mainly as a result of all the money the central banks have been printing but partly because some up and coming societies like Chindia and others are now consuming more because of their new found prosperity. Those who believe inflation does not exist cherry pick their data. While they acknowledge some basic commodities prices are higher they counter that real estate values have plummeted. They got that right! except that for the most part plummeting home values do not result in increase in disposable income . People don't have to buy something they can't afford but they do need to buy wheat, rice, butter etc...so this attempt at arguing there is no inflation doesn't really hold water. Additionally, because of globalization what used to be a home grown phenomena, inflation, is now like any other commodity that can be imported from far away places. As the factory of the world China exports its inflation just as easily as, and through, its exports of manufactured goods. Like other economic concepts inflation can take many forms including outright increases in the price of basic raw materials and the appreciation of a currency. That is why countries have been rushing to fight off inflation by increasing interest rates or imposing measures to devalue, or at least limit the appreciation of, their currencies by making them less attractive to foreign investors hoping to discourage foreign capital inflows.
The ghost is here. It may not be fully visible yet because most companies have not been able to pass on the increase to the final consumer. Make no mistake business to business inflation is here and widely acknowledged. If there is no relief at some point (soon) businesses will have to make the decision of whether to take a hit to the bottom line or attempt to pass on the extra cost. Do you want to bet which way they will go?
It is nearly impossible to reverse the flow of water once it starts down the drain. But again maybe this is the plan. Bernanke said a little inflation is not a bad thing. The problem is how do you engineer and control a little inflation with such a huge amount of liquidity. The answer is you can't. You just hope that the length of the drain that water has to travel is short. And short treasuries is what you do to keep your head above water.
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