Inflation, Injustice, and the American Economy

Finance at First Light
Good morning! Here’s what you need to know:
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OVERVIEW

  • Inflation | It’s showing up everywhere but has been bullish for stocks.
  • Injustice | None of the crooks behind the financial crisis are in jail — maybe because they changed the laws before misbehaving.
  • US Economy | Japan thinks America is recovering less strongly than advertised, but big companies and the Fed disagree.

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BRIEFING

1. How Dangerous is Inflation?

January inflation in the US came in higher than expected at 1.6 percent yesterday, Europe’s cost-of-living index is at a two-year high, and Chinese prices are rising. Early this morning at the G-20 meeting in Paris, French Finance Minister Christine Lagarde told Bloomberg, “We clearly need to keep inflation at bay. Too much inflation is not going to be conducive to growth.”

Federal Reserve Bank of Kansas President Thomas Hoenig told Fox Business that the uptick in US inflation confirms his previous warnings about higher inflation. He said January’s data combined with December’s are “indications that inflation is rising slowly, modestly — but still rising.” He blamed it on “a highly accommodative monetary policy” and explained that inflation always appears in “very small increases.” He said, “It starts slowly, perhaps as we’re seeing now, and builds over time. And you have to anticipate that.”

Jeff Miller thinks it’s “easy to be a demagogue about inflation.” He points out that “core inflation is pretty much at zero” and “money supply growth is normal or below the levels we would expect for economic recovery. It is not at a level that would stimulate inflation.” What’s more, “a little inflation would be good for the economy and good for equities.” People should stop unwisely fighting the Fed because it’s “determined to get core rates up to 2 percent or so and take deflation off of the table. If they are too slow to react, it is still a bullish environment for stocks.”

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2. Why Aren’t Financial Crooks in Jail?

Matt Taibbi wrote in the March 3, 2011 issue of Rolling Stone: “Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What’s more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even ‘one dollar’ just months before his unit imploded, to the $263M in compensation that former Lehman chief Dick ‘The Gorilla’ Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.”

Nitasha Tiku wrote in New York Magazine that the problem is even worse than a bunch of fat cats in tight with lawmakers. It’s that they didn’t have to break any laws to commit their crimes because they lobbied to remove the laws preventing their actions. The problem with Taibbi’s argument is “that in a piece about the Feds, the failure to prosecute and jail these Wall Street criminals, and the willingness to ignore mountains of evidence and the SEC’s incestuousness with the firms they’re supposed to oversee, he almost never mentions the laws regulating their financial misdeeds — whether they exist or were dismantled (ahem, Glass-Steagall), and the difficulty of getting a conviction off those charges, or whether they are jailable offenses.”

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3. How Strong is the US Economic Recovery?

Not very, according to the Bank of Japan. Its policy board members cautioned against excessive optimism toward the US economy in the minutes of their Jan 24-25 meeting. Considering that the American “economy continued to be burdened with balance-sheet adjustments, the prevailing view among market participants about the economic outlook might be somewhat too optimistic,” the minutes revealed. Many members also noted that “the housing market remained sluggish and the employment and income situation had not improved noticeably, as seen in the slow pace of increase in the number of employees in the private sector and the high unemployment rate. Many members expressed the view that improvement in the employment and income situation and a repairing of balance sheets were vital to achieving a full-fledged recovery in consumption, and therefore the pace of recovery in the US economy would likely remain moderate for the time being.”

A positive sign, however, is that corporations are putting their cash hoard back to work. Bloomberg reported that “since mid-2009, Standard & Poor’s 500 companies reduced cash and short-term investments to $2.41T from a record $2.46T” and capital spending “increased $22.3B, the biggest quarter-to-quarter jump since the end of 2004, to $142.8B, the highest level in two years.”

Also, the Federal Open Market Committee meeting on Jan 25-26 offered an improved outlook on the US economy with an expectation for GDP to climb in a range between 3.4 percent and 3.9 percent this year, up from their November forecast in a range between 3.0 percent and 3.6 percent.

Have a great day!
Jason Kelly

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One Comment

  1. Posted February 19, 2011 at 5:25 pm | Permalink

    It is but natural that big companies and Fed is disagree with what Japan things about America. Because American economy is really at very nice improving and they are also very much optimistic about it.

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