First, the current policies will need to remain or continue to expand. Should the Federal Reserve change course and start withdrawing the created liquidity, then an inflation might be avoided. That potential window of opportunity is fast closing currently.
Currently, we are still seeing Bank failures amongst banks deemed too small to save. This while patently unfair, is simply what really should have happened to the larger failures that have been propped up, Citi et al.
Eventually the bank failure rate will slow and end. At that point we will be left with healthy banks that survived on their own merits, primarily the smaller regional banks and the large, artificially saved money centre banks that are puppets of the Federal Reserve, itself a puppet of government.
Capital will be assigned to the relatively more profitable stages of production. Unless we continue to see sustained voluntary saving from the consumer, that area will be consumer goods. Even in a heightened saving environment, consumer goods will be relatively more profitable.
That being the case, we should expect in the future to see some increase in employment within this sector.
Within the initial data series we can see that retail/food sales dropped significantly. While the employment picture was also bad, it has held up relatively well when compared and contrasted within two capital goods intensive industries, consumer durable goods and mining.
Profits, while they may well be diminished within consumer goods, will remain higher relatively than they are in capital intensive industry due to the tighter credit conditions imposed by the banking sector. Labour will relative to capital become cheaper. Thus, the increased profitability of the consumer goods will attract a relative expansion in this sector, and a severe contraction in stages of production furthest from consumption.
The outcome will be a gradual absorbtion of inventory levels, which currently are still high. This high inventory level will cap currently any inflationary pressures within the consumer goods.
We can see from the PMI data however that purchases are starting to pick-up from the plunge initiated from the credit freeze-up.
As this trend continues, we will hit a snag. Productivity will have been hamstrung via the poor choices manifested via the manipulated interest rates. The demand will start to exceed the supply, thus prices will start to rise to reflect this imbalance. Capital will have been consumed. The productivity cannot just be switched back on. Therefore the shape and depth of productive capability are inappropriate for the emerging and artificially stimulated consumer demand.
The stimulus packages by creating a new and increased money supply underpin this demand for consumer goods. The stage is set for a rapidly escalating inflationary scenario and new problem for the Federal Reserve – whose traditional response is to raise the short-end of interest rates, thus pushing up the long-term interest rates.
Various raw commodities also act as consumer goods, viz. oil [coal, gas] that produces petrol, electricity, heating etc. In an inflationary environment, they will maintain their exchange values, thus matching and in another potential speculative frenzy, possibly exceeding [again] real exchange values.
In summary, inflation always is insiduous, markets are always hyper. That there is little detectable inflation currently, although it is already there in some commodities – oil, agriculture, it has not yet invaded the public domain in CPI based calculations. Due to forces already in play, launched via the Federal Reserve and government, these forces are set to increase.
