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Inflation is not around the corner

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POSTED June 20, 2013 11:35 p.m.

Editor, Manteca Bulletin,

There is a lot of noise about inflation. The general opinion is that it is inevitable with today’s low interest rate policies. I don’t see it that way for the following reasons:

Most corporations are not hiring. They are borrowing at low rates and buying back their stock because that is the best  and safest return they can get, If a company has a 15% profit margin and they can borrow money at 5% in the marketplace to buy their stock back they make 10%. Also, they get to deduct the interest on the bonds so it is even more cash flow positive. There is risk in hiring new people and making investments and finding 10% immediate returns is very difficult if not impossible.

This means that hiring will stay subdued and without jobs there is a lack of demand to create inflation.

The baby boomers control most of the net worth in the USA. The baby boomers have not saved enough for retirement and are playing catch up by putting everything they can in their retirement savings account. When they do this they don’t make purchases.

This lowers demand and stifles job growth. This lack of purchasing keeps inflation low.

The baby boomers don’t need stuff. Most have bought more stuff than they have the time or inclination to use.

Again this lack of demand stifles inflation.

The Federal Reserve has a cheap money policy to keep deflation at bay. Benanke is more worried about another deflationary cycle than an inflationary cycle. When homeowners have no equity in their houses it makes them less reluctant to spend and they can’t get a HELOC.

Our chances of seeing inflation is limited until homeowners have some equity.

The Federal Reserve can’t just force interest rates up without hurting our European allies. If Europeans can get higher interest payments here than in Europe and a stronger dollar created by the higher interest rates then they will move their money here. That would be devastating to their already fragile economy.

The Federal Reserve is working in concert with their European equivalents to solve the world’s economic problems, not just ours because it is a world market place. We won’t get too far ahead of the herd.

This means that rates will stay relatively close to European rates and the scenario will stay much the same until all the stock purchase and available deals are made.

Congress can’t agree on anything so getting any jobs bills passed or getting any certainty about the country’s direction will be impossible. It doesn’t look like this stalemate will end any time soon.

Businesses won’t hire until they can invest with more certainty and get some pricing power. There is too much upside in buying their own stock back or buying a competitor than investing in more jobs. Buying competitors is a job destroyer not a job creator and we have not yet gone through that cycle. It is easier to buy market share than steal market share.

Interest rates have been kept artificially low by the Federal Reserve through its purchase of mortgage backed securities and government debt at the rate of 85 billion dollars a month. The question is when will they stop? It doesn’t appear to be any time soon. The American household is still deleveraging.



Mark Laurora
Manteca
June 20, 2013

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