Investors Fear Rising Inflation

What goes around, comes around...

Every country in the world has had to put up with finger wagging and scolding from U.S. officials. The U.S. economy was the world’s best for so many years – and American experts, government officials, professors and consultants never got tired of saying so.

But now...as the Rolling Stones put it... "Tables turn and now her turn to cry." Now, the tears are coming from the United States; the foreigners are doing the scolding.

Bloomberg reports that U.S. housing starts are at their lowest level in 17 years. Housing prices are going down too, while consumer prices go up – both apparently at a faster and faster rate.

Producer prices in the United States rose 1.4% last month, following an increase of 0.2% the month before...annualizing the two months gives us a rate just shy of 10%.

Meanwhile, prices paid by producers were 7.2% higher than a year ago.

Worldwide inflation is about 7%, says Bill Gross of PIMCO. And since price inflation has now been globalized, there is no escaping. Here in Britain, consumer price inflation, officially, is running at its highest rate in 10 years.

"There is really nothing we can do about it," said an analyst at this morning’s investment meeting. "We’re a small island. We have to import things from overseas. Prices are rising everywhere. How can they not rise here? We’re just at the beginning of this trend. It’s going to get worse."

It is going to get worse everywhere. Inflation is in the pipes. Soon, it will be backing up in the bathtub drain and spilling over from the sink. Over the last 15 years, the world has seen huge inputs of ‘liquidity’ – cash and credit from central banks and the financial industry. Everyone was perfectly happy when this juice was going into asset prices. But one by one the bubbles have popped...and now the liquidity goes where it is unwelcome – into commodities, food, and fuel.

Consumers and central banks are both trapped. Central banks want to lower rates and increase liquidity in order to stimulate a sagging economy. But their inflation no longer swells assets prices and nourishes economic growth; now it leaks into consumer prices.

And the poor American consumer...he spent his entire career preparing for an economy that no longer exists. He has a big house...a big car...and, often, a big mortgage. America’s far-flung suburbs were invented when gasoline was only about 25 cents a gallon and real U.S. incomes were rising. We remember it well. We’d drive into a gas station and tell the pump monkey: "Let me have $2 worth." Heck, 2 bucks’ worth was all you needed. You got eight gallons – enough to last you all week. Now, gasoline is $4 a gallon...and real incomes are scarcely higher than they were in the late ’60s. And now the typical commuter lives too far out in the suburbs to walk to work. And even if he could, this item from the Wall Street Journal offers little comfort:

"Pain at the Other Pump: Shoe Prices Rise." The story tells us that footwear is going up too – about 10% to 15% next year, which "would be the largest single-year increase in more than 50 years."

And the poor man didn’t bother to save money, because he didn’t need to. His house rose in price...and there was always someone ready to lend him money when he needed it. But now...the cost of credit is going up too.

What we are looking at is big. It’s an historic turnaround. In financial terms, it is the end of the era of cheap credit. In cultural terms, it’s the end of the prosperous, suburban U.S.A. as we have known it...the U.S.A. that we grew up in.

The last credit expansion began, by the way, with the Reagan Revolution, in the very early ’80s, with bond yields over 15%. It ended either in 2003 or 2005 or a couple weeks ago. Yields on the 10-year Treasury note fell below 4% on several occasions. But now they are rising. Investors fear rising inflation. Even at current rates, they still buy treasuries at yields below the rate of consumer price inflation. But they’ll regret it, in our opinion. The trend seems to be up. It is the beginning of what probably will be a long period of higher inflation rates...higher bond yields...and tighter credit generally.

So too have we entered into a period of higher energy costs. The price of oil hit a new intraday high yesterday at nearly $140. It will probably drop back below $100...but the days of $10...$20...or even $50 oil are probably gone forever.

And the suburbs? Are they dead too? We don’t know...but hope so; we never liked them.

All this is bad news for people who organized their lives on cheap oil and cheap credit – especially those for whom it is too late to make big changes.

USA Today reports, for example, that the rate of bankruptcy is skyrocketing among old people. From 1991 to 2007, the rate went up 150%. But for those 75 to 84, the rate has exploded 433%.

The poor codgers. It’s bad enough being old. Imagine being broke too.

Bill Bonner
The Daily Reckoning Australia

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• What Inflation Means to Central Bankers, Investors and the Consumer
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• Everyone We Know Expects a Fairly Quick Up-move in Inflation