With large budget deficits in place and projected going forward, as well as the expansion of the Fed's balance sheet, there's been some talk of inflationary pressures, and even hyper-inflation [0] McCain. I wondered if these fears were manifested in survey- and market-based expectations measures.

For certain, there is little pressure apparent in short term forecasts like the WSJ and Survey of Professional Forecasters. This makes sense (at least if one believes in the Keynesian conception of an output gap [1]) given the amount of slack displayed in Figure 1.

Figure 1: Median expected ten year inflation recorded as of second month of each quarter, from Survey of Professional Forecasters (blue, left scale), actual CBO-defined output gap (red line), and WSJ forecasted (purple triangle), in log percentage points. NBER defined recessions shaded gray; second recession assumed to end 2009Q3. Source: Cleveland Fed, BEA, GDP 2009Q1 ...

A year and half ago, I asked "Does it matter that yield curves (around the world) are sloping downward?" (October 12, 2007). I included this snapshot of term premia in the post:

Figure 1: Ten year benchmark bond yield minus three month yield spreads, from Economist, Oct. 12, 2007 and Oct. 11, 2006 issues, and author's calculations.

In response to my speculation that recession was impending, one reader wrote:

The yield curves are different today because so many central banks are buying long-term debt with their freshly created Yuan, Yen, etc. They do not express what they did in the past.

At that juncture, I was also pretty circumspect myself about the predictive power of the yield curve, given the conundrum, the "saving glut", and the Great Moderation. Ensuing events (e.g., worldwide recession) inspired Kavan Kucko and myself to write this paper (recently presented at this

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div align=”justify”A town in California blighted by the real-estate bust is having the sun burnt lawns of foreclosed homes sprayed with green paint to create the illusion of prosperity; now the Fed is spraying the tattered US economy with Greenbacks to create a similar illusion. emstrongThe question is: why now? The answer is: because foreign buying of Treasuries is drying up/strong/em, a development I’ve been flagging as inevitable for a while now. Even if foreign official buyers like central banks had a continued appetite for US debt exposure, the fact is that their trade surpluses have collapsed with US import demand. /divdiv align=”justify”Asian merchandise exporters and OPEC have far smaller dollar surpluses to recycle into US debt markets this year even as supply soars; their purchases of agency debt started slumping last Summer, forcing the US government’s hand on Fannie and Freddie; now Treasury buying is also slumping as shown …

The U.S. Producer Price Index (PPI) and Consumer Price Index (CPI) both fell in October. Those declines – combined with sharp downward spirals in worldwide stock and commodity prices – have caused many analysts, and even central bankers, to worry that we are on the brink of deflation.

Such concerns may be warranted in the short-term. But in the long run, deflation won’t be the challenge we face.

Thanks to an overly aggressive central bank, and more than $1.5 trillion in U.S. Treasury Department bailout programs – as well as other factors related to the ongoing global financial crisis – inflation will be the problem that ultimately bedevils us.

As long as oil and commodity prices drop, the PPI and CPI indices, which include oil and commodity prices, also will fall. Such a decline, however, does not constitute deflation; it is simply a one-time price adjustment. This is particularly true if most

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The U.S. Producer Price Index (PPI) and Consumer Price Index (CPI) both fell in October. Those declines – combined with sharp downward spirals in worldwide stock and commodity prices – have caused many analysts, and even central bankers, to worry that we are on the brink of deflation. Such concerns may be warranted in the short-term. But in the long run, deflation won’t be the challenge we face. Thanks to an overly aggressive central bank, and more than $1.5 trillion in U.S. Treasury Department bailout programs – as well as other factors related to the ongoing global financial crisis – inflation will be the problem that ultimately bedevils us. As long as oil and commodity prices drop, the PPI and CPI indices, which include oil and commodity prices, also will fall. Such a decline, however, does not constitute deflation; it is simply a one-time ...

At "A Dash" we have some strong viewpoints about the Fed.  Prior articles have covered this point, including the following key points: Most of the big-time Street critics of the Fed (including plenty of those who are really smart, great traders, and offer timely advice) are overplaying their hand with Fed criticism. Wall Street guys need to learn that intelligent people can look at the same data and reach different conclusions.  The fact that one has a lot of money to manage or gets a big paycheck does not imply omniscience. People confuse what they believe the Fed should do with what they expect the Fed to do.  There is more money to be made by predicting the Fed, than by pontificating about their errors. Disparaging the actual credentials of others does not increase one's status.  The Internet and mass media create a playing ...