Estimate of Inflation over the next decade

[scorpioncapital]

Can someone please criticize this analysis and let me know if they expect less or more inflation and if so how much more or less and why. I'm looking for the most likely outcome not catastrophic scenarios.

Thanks!

 

Assumption #1: President Barack Obama's budget would produce $9.3 trillion in deficits over the next decade. By 2013, the end of the president's first term, the budget cuts the deficit to $533 billion or 3.0 percent of GDP”

 

Assumption #2:  M2 of $8 trillion includes cash and currency, checking deposits, and some short-term savings.

 

Assumption #3: “The Obama administration expects to run annual deficits between $1-$2 trillion a year for the next decade, and we estimate that foreign buyers might only buy one-third to half that amount of debt. The Fed will have to monetize $3.75 trillion to $5.25 trillion over the next few years, just to buy the U.S. government debt."

 

Assumption #5: The total potential cost of the financial bailout to the U.S. taxpayer is already rapidly approaching $5 trillion

 

Implies: 

4%-5% annual inflation over the next decade

Assuming the Fed soaks up the excess bailout estimate of $5 trillion with 80% efficiency, the rate becomes 6%.

 

Total Inflation over the decade: 50%-60%

[Junto]

Can someone please criticize this analysis and let me know if they expect less or more inflation and if so how much more or less and why. I'm looking for the most likely outcome not catastrophic scenarios.

Thanks!

 

Assumption #1: President Barack Obama's budget would produce $9.3 trillion in deficits over the next decade. By 2013, the end of the president's first term, the budget cuts the deficit to $533 billion or 3.0 percent of GDP”

 

Assumption #2:  M2 of $8 trillion includes cash and currency, checking deposits, and some short-term savings.

 

Assumption #3: “The Obama administration expects to run annual deficits between $1-$2 trillion a year for the next decade, and we estimate that foreign buyers might only buy one-third to half that amount of debt. The Fed will have to monetize $3.75 trillion to $5.25 trillion over the next few years, just to buy the U.S. government debt."

 

Assumption #5: The total potential cost of the financial bailout to the U.S. taxpayer is already rapidly approaching $5 trillion

 

Implies: 

4%-5% annual inflation over the next decade

Assuming the Fed soaks up the excess bailout estimate of $5 trillion with 80% efficiency, the rate becomes 6%.

 

Total Inflation over the decade: 50%-60%

 

 

Good WSJ article on the situation: "Best Check on Inflation: Broken Banks" http://online.wsj.com/article/SB123750104783789229.html

 

    *

 

"With the Fed training a monetary fire hose on the financial system, many in currency and other markets are getting itchy about inflation. But without an effective fix for the banking sector, they are likely getting ahead of themselves.

 

Inflation may be a monetary phenomenon, to paraphrase Milton Friedman, but money is only inflationary if it gets spent quickly. Right now, it isn't getting spent very quickly at all.

[M2 money velocity, quarterly]

 

M2 money supply, a measure of money in the system that includes time deposits, such as certificates of deposit, has grown by $767 billion, or 10%, in the past year, according to Federal Reserve data released Thursday afternoon.

 

A separate measure compiled by the St. Louis Fed, called MZM, designed to better measure liquidity, has grown even faster, up $991 billion, or 12%, in the past year.

 

But the velocity of money -- or the speed with which money is spent -- fell in the fourth quarter to its lowest level since 1991, as measured by the ratio of gross domestic product to M2 money supply."

 

continued at wsj.com

 

[Packer16]

I think you may be underestimating the potential inflation because:

 

1.  Spending always seems to be underestimated (and it is difficult to slow down) and tax receipts overestimated (the money may be there now but by the time tax increases go into effect the revenue from the top 5% may have gone somewhere it will be taxed at a lower rate or will be deferred), this will lead to higher deficits.  I am disappointed buy the lack of stimulus (primarily funding state deficits that are a result of states overspending) in this package and some of the stimulus projects are just silly.  For example, in upstate NY one proposal is to spending billions of dollars to build a high-speed rail system.  This is a total make work project that will have very little long-term benefits to the region other that creating the job to construct the railway;

 

2.  The interest on the debt will be higher than expected if the debt is not monetized and monetization may lead to a flight from the dollar.  China has stated their issues and their desire for an alternative to the dollar.  If one is not provided, they may just sell dollars and buy a basket of commodities they will eventually consume.  The flight from the dollar might accelerate if an alternative reserve currency is developed.  This flight may reduce the expected purchase of dollars by foreigners.  

 

3.  Monetization of the debt is least painful way of delevering both consumers and the US gov't after all this spending.

 

4.  Other trends in including the card check legislation, cap-and-trade subsidies to alternative energies which are all inflationary as the costs will be passed unto the consumers.    

 

The US may end up with a stagflation similar to emerging markets has in 1990s after their currency has collapsed.  Other more disciplined countries' currencies (such as Canada, Australia and the Eurozone) may be in better shape than the US dollar.

 

Packer

[Guest ericopoly]

Well, all hope is not lost.  At least there is a lot of discretionary spending that can be reigned in.  It isn't like we're down to bare bones.

 

 

 

http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

 

The 2005 U.S. military budget is almost as much as the rest of the world's defense spending combined [5] and is over eight times larger than the official military budget of China. (Note that this comparison is done in nominal value US dollars and thus is adjusted for purchasing power parity.) The United States and its close allies are responsible for about two-thirds of the world's military spending (of which, in turn, the U.S. is responsible for the majority). In 2007, US military spending was above 1/4 of combined industrial and agricultural production in the USA.

 

Military discretionary spending accounts for more than half of the U.S. federal discretionary spending, which is all of the U.S. federal government budget that is not appropriated for mandatory spending.[6]

 

In 2003, the United States spent about 47% of the world's total military spending of US$910.6 billion, according to the Stockholm International Peace Research Institute.

 

 

During FY 2008, the U.S. government spent nearly $800 billion on defense and homeland security, approximately 30% of tax collections.

 

As much as the U.S. Navy has shrunk since the end of the Cold War, for example, in terms of tonnage, its battle fleet is still larger than the next 13 navies combined -- and 11 of those 13 navies are U.S. allies or partners.

 

 

[Packer16]

The decline in military spending is based upon an untested theory that if we can talk our way out of conflicts with little or no real military ability to back up our threats/diplomacy.  This was tried with Carter and was found lacking.  In addition, the budget put forth assumes this rosy scenario.  If does not come to pass, then the deficit will become worse and tyrants will become more emboldened as they know the threat to their power is declining. 

 

I think as long as major portions of the world have leaders who don't respect compromise but look it as a weakness (everywhere except the US, Canada, Europe and Japan) you need to spend to provide a credible threat (and can provide technology spin-offs).  If you do not, others will walk all over you (like what happened under Carter and may happen again) and the cost to re-establish the threat can be higher than if we had kept the spending up to begin with.

 

Packer 

[Guest ericopoly]

WWII brought us the bikini innovation (saving material), so in many ways I'm hoping this economic pearl harbor brings us to the brink and we get some mini, mini string or you know, maybe a single thread if things get really bad.

[UhuruPeak]

WWII brought us the bikini innovation (saving material), so in many ways I'm hoping this economic pearl harbor brings us to the brink and we get some mini, mini string or you know, maybe a single thread if things get really bad.

 

 

Depends on where you live... I doubt our Alabama friends would be too happy with the thought!  8) (I wish there was a 'disgusted' smiley, lol)

[Guest Broxburnboy]

"But the velocity of money -- or the speed with which money is spent -- fell in the fourth quarter to its lowest level since 1991, as measured by the ratio of gross domestic product to M2 money supply."

 

It is disturbing that the decreases in the velocity of money has not produced consumer price deflation as it should... and it doesn't look like this is going to happen soon, barring a collapse

of the financial system.  Although asset prices have taken a hit, for the most part the cost of essential goods and services have not. Home prices  are down, monthly rents are not. CPI inflation, by any measure is not negative (see shadowstats.com).  Unemployment has spiked, consumer spending is down but consumer price inflation by any measure is still positive.

 

Theoretically, this can only happen if the volume of the new dollars put in circulation is making up for the drop in velocity of the existing stock. Come to think of it, this condition is the stated object of the Fed's current monetary policy...to forestall a deflationary depression. So what happens when an economic recovery ensues and velocity picks up? In a word ...Inflation. Inflation will then have to be reeled in by rising interest rates ( a la 1980), higher taxes, sharply decreased government spending (military spending cuts will be mandatory).

Keynesian logic calls for the application of wage and price controls during inflationary periods, that may happen, but the experience of such during the Nixon administration illustrated the difficulties and subsequent ineffectiveness of controls during peacetime.

Calculating the actual rate of inflation without knowing the outcome of current fiscal and monetary policies, is strictly a speculative undertaking.

 

In short it is difficult to estimate real numbers for inflation, but it looks certain that inflation will be coming soon. The US government can't let interest rates rise until the housing market and bank balance sheets stabilize, therefore if inflation returns shortly it may be uncontrollable. There is also a possibility that a long period of stagnation will ensue ( a la Japan) where the economy finds equilibrium in negative real growth, and mild inflation in order to spread out real losses over  decades.