This is Scary

After a nice vacation on Cape Cod with our kids, we have returned to work a little more tan and a lot more rested. Fortunately, it was a slow news period while we were away. The stock market bounced around a bit, so what else is new. The economic news was mixed, again nothing to get excited over. Most of the news dealt with the death of Michael Jackson, which meant I didn't pay much attention to the news.

Since there isn't really any surprising economic news to comment on, I thought I'd link to a story that isn't related to economics or finance. This was in today's Wall Street Journal. Apparently the Texas Board of Education has moved on from debating how much religion should be taught in Biology (evolution vs. creation), to how much religion should be taught in History. Call me crazy, but shouldn't religion be taught in Church? (Disclosure: My kids do attend church school on Sundays.)

Hooray for Summer!

Yes, despite the weather, it is indeed summer! We have officially made it to July, and western civilization has not collapsed. This is great news, because about five months ago, lots of people were worried that we may not make it. So far, so good.

As of today, we here at Bond and Company are taking a quick vacation, as we head down to Cape Cod for some beach time. As always, we will be accessible via voice mail and e-mail, but we may not make another blog post for a few weeks.

We hope everyone has a great 4th of July!

Some People Never Learn

There will always be debate among economists about exactly what caused the credit crisis of last year to explode into such a financial mess. However, there is fairly strong agreement about who and what are the primary suspects. The disagreement arises when determining which suspects played the most important roles. My own analysis puts Barney Frank near the top of the list, because he was one of the leading drivers in the push for Fannie Mae and Freddie Mac to lower lending standards. (You can't have sub-prime loans without lower standards.)

Now our friend Barney is at it again, asking Fannie and Freddie to lower lending standards. He's like some sort of creature from a horror movie; just when you think he's gone, he pops back up with an ax and a chain saw.

Of course, let's not forget that it was only a month ago when Barney did this -- "asking" the now government-owned General Motors to keep a parts distribution warehouse open in his district. I can't think of a better way to bring a company back to profitability than to have Barney on board.

Daydreaming is Good!

This is the best news I've read in a long time, daydreaming is an important way in which the brain works to solve problems. Further evidence that the human brain is a very complex system that we are only beginning to understand.

What is inflation?

I read this article, "Stocks in the Black on Gusher of Cash" in last Saturday's Wall Street Journal. The thesis posited in the article is that the recent surge in global stock markets is largely due to the money that has been created by the Federal Reserve finding its way into stock markets. This is what I have been saying; that the Federal Reserve is purposely trying to raise prices (i.e. cause inflation) by creating money.

Since I read this article last weekend, I have come across numerous other articles discussing the topic of inflation and Fed policies. Obviously, this is a hot topic right now. It also happens to be an area in which I have a great interest. One of my favorite economist of all time (yes, I have favorite economists, which didn't help me get dates in high school) is Milton Friedman, who is the grandfather of modern monetary and inflation theory. Dr. Friedman defined inflation as:

"Too much money chasing too few goods"

It is this definition that leads directly to the premise that, if the Fed is creating money, then there will be more money. If we keep the amount of goods constant, then, by definition, we will have more money chasing the same amount goods, so prices will go up.

The actual functioning of this process is much more nuanced than my simple explanation, and this is where the confusion starts. What I find fascinating is the number of articles I'm reading which seem to doubt or misinterpret the basic underlying definition of inflation. Here's an example, in which the article discusses the role of excess capacity in the economy. The main idea is that having excess capacity subdues the inflationary affects of printing money, because producers are unable, or unwilling, to raise prices when they are trying to unload inventory.

It is not that this argument does not add value to the discussion, but the problem is that it places the impetus for inflation on the producer's incentive to raise prices. The massive increase in money supply, which is presently occurring, changes the playing field in and of itself, and it is the volume of money that starts the inflationary ball rolling. For me, the question is not whether or not we will have inflation. The question is, will we be able to stop the ball rolling to far or too fast?

This and That

A few items from around the blogosphere (courtesy of the The Wallet blog at the Wall Street Journal)

This one, from Clusterstock, gives a few explanations as to why stocks have been going up so rapidly over the past few months. I tend to agree with the savings and inflation stories.

A bit of optimism from the Richmond Fed. They are claiming that the recovery has already begun. I like optimism, but we should all remain cautious. There is certainly the possibility of more short-term pain before things get better.

Finally, here is some information on tax credits available for energy efficiency improvements to your home.

Maybe We Won't Have Inflation

This article was brought to my attention by one of our clients. The gist of the article is that all of the money being created by the Federal Reserve will not cause inflation as we have been claiming. The gentleman quoted in the article, Lacy Hunt, makes the argument that all of the debt accumulated in the economy over the past decade will continue to be such an economic drag that money won't move fast enough to generate any inflation. I am skeptical about this analysis, because it relies on historical comparisons to times when the nature of the economy and money itself were radically different than now. Drawing conclusions about the current situation from what happened in 1818 strikes me as not very convincing.

Instead, we have to look at the current nature of our global economy, which is characterized by fast moving money that has no national boundaries, rapid technological change, and billions of new economic participants in countries like India and China. I think these are the reasons that we have not seen much inflation over the past decade. However, the current actions of the Federal Reserve are so dramatic that I think a general rise in price levels is almost inevitable.

Mr. Hunt may very well turn out to be right, but I am not convinced that inflation is not on our doorstep.