All Blog Posts from Econwatch

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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In today's "Reality Check" (Click here to view the video) MoneyWatch Editor-in-Chief Eric Schurenberg and I discussed the economic smack-down of the moment: inflation vs. deflation.

Although most economists understand that a recession, especially one highlighted by significant deleveraging, is deflationary, the worry is that the massive government spending spree (trillions of dollars since Lehman's collapse) will lead to higher inflation down the line.

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CBSNews.com Editor In Chief Dan Farber and CBS Moneywatch.com Editor-at-Large Jill Schlesinger spoke Monday morning about the major stories expected to happen this week in business news.

One major focus this week will be on four financial services companies that received taxpayer funds from the Troubled Asset Relief Program, or TARP. The companies are expected to file quarterly earnings reports with the government. Farber and Schlesinger also talk about the relationship between deflation, inflation and gold prices, which Schlesinger wrote about for Moneywatch Monday.

Check EconWatch next Monday for another summary of what's expected in the week's business news.


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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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With the same fervor that causes pundits to prematurely declare the death of the dollar, so too are worries about future inflation bubbling up. You hear people saying, "of course inflation is coming, just look at the soaring price of gold as an indication!" Sorry to disappoint, but but as a former gold trader, I can tell you that it's been a long time since gold prices traded as an inflation hedge. Rather gold has traded alternatively as a fear asset or a risk asset.


When investors think the financial world is coming to an end, they sometimes turn to gold. This is in line with my dearly departed step-grandmother, who said that it was the gold that her mother sewed in the lining of her cloth coat that allowed her to escape the Nazis when they marched into her Hungarian village. Alternatively, when you see stocks, bonds and gold all rising concurrently as the dollar is dropping, that's a pretty good indication that ol' fashioned greed is back on the scene, courtesy of the world's central banks.

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When the interest rate decision is announced today, the Federal Open Market Committee will most likely leave its current monetary policy unchanged and say that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."


In other words, just because Chairman Bernanke said that the recession is "technically over," that doesn't mean that consumers are feeling too swell or that Fed policy will shift. Fed governors have told us as much in their public statements and appearances. Just because we have backed away from the edge of disaster doesn't mean that a sustained recovery is baked in the cake.

Here's what I think is on Bernanke's mind right now:

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The global economy is bottoming out, but the recovery could be slow and fraught with the risk of backsliding into another downturn.

That's what Nouriel Roubini, an economics professor at Stern School of Business at NYU, wrote in a Financial Times op-ed Sunday. In forecasting just what sort of recovery the world will embark on – a quicker "V-shape" or slower "U-shape" – Roubini raises the prospects of a possible "W-shaped" rebound, which will see near-term growth followed by another recession.

What might cause this? Roubini writes that the exorbitant deficits countries like the U.S. are currently running up pose a dilemma for lawmakers. They could raise taxes and cut spending, but that might squelch the recovery before it really gets a chance to begin. They could also ignore deficits and risk a recovery-suppressing bout of inflation.

There's also the fact that food and energy price are on the rise – at a rate higher than the economy warrants, Roubini writes – and there's reason to fear they may get even higher. With a lot of extra cash on hand, thanks to taxpayer-financed bailouts, traders might speculate on commodities (remember when oil topped $145 a barrel?). But a spike of that amount could lead to a similarly prodigious shock to the world economy.

In all, Roubini sees a "U-shaped" recovery, meaning slow growth that could take a couple of years. But the dangers of a "double-dip recession" are out there.

Is the worst of the economic storm behind us?

Consider the evidence: the Dow Jones Industrial Average leapt about 7.3 percent this week to its biggest weekly gain since March. Positive earnings or upbeat remarks from Intel, Goldman Sachs, and JPMorgan Chase have contributed to the optimism. During the past five days, stock market bears have been roasted alive.

Yet. And but. There is another side to the story, which is the lackluster state of much of the rest of the economy. Heavy consumer debt loads have not vanished. Neither have the housing market's woes, and still-to-come price declines in many areas. CIT Group's potential demise -- for once, a Wall Street firm that didn't get a bailout -- is further evidence that the plague of financial contagion has not run its course.

On the earnings front, the Wall Street Journal reminds us that analysts predict all 10 of the major industry groups represented in the Standard & Poor's 500-stock index will experience a second-quarter decline in profitability from 2008 to 2009.

A Goldman Sachs report says: "We find that under reasonable parameters of supply and demand growth, it will take at least two years, and probably more like three to five years, to eliminate spare capacity in the manufacturing sector... In the labor market, the unemployment rate is likely to remain above the current concept of 'normal' for an even longer period."

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Despite the president's claim at a joint appearance this afternoon that "I like Chancellor Merkel a lot," President Barack Obama and Germany's Angela Merkel are widely believed to have a somewhat frosty relationship. The biggest perceived rift between the two? How best to respond to the global financial crisis.

Mr. Obama, of course, has pushed through a massive stimulus package and pressed for greater government spending worldwide to end the recession. Merkel, who helms the largest economy in Europe, has resisted such spending; her government has passed only a pair of small stimulus packages in response to the economic crisis.

One reason for the two leaders' different philosophies is ideological: Merkel is a center-right politician who has argued against bank bailouts in Europe. But German history is also a factor. Under the German parliamentary governmental system known as the Weimar Republic, Germans faced hyperinflation in the 1920s that destroyed savings and drove many people into poverty. Here's one (fictionalized) account of what it was like:

The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

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The plan dreamed up by the Obama administration and the Federal Reserve for an economic recovery included a big bet: that interest rates would remain extremely low. That would, they hoped, spur borrowing and lending, encourage mortgage refinancing, and even lend support to housing prices.

We're already seeing signs that this bet may not pay off. One came on Wednesday, when long-term interest rates hit a high for the year when investors forced the Treasury Department to offer higher interest rates. Another may come on Thursday afternoon if investors remain leery of the Treasury's attempt to auction 30-year bonds.

Fixed-rate mortgages are becoming more expensive. A 30-year fixed-rate mortgage is now 6.1 percent, according to financial data firm HSH Associates, up about a full percentage point from a few weeks ago. (This means far fewer people will refinance -- one estimate puts it at 50 percent fewer -- and housing prices in the most bubbly areas may fall even faster than before.)

The reason for the interest rate hikes? Increased fears that the U.S. government is borrowing so much it won't be able to pay it back without printing money. The greater the perceived political and currency risks, the higher the interest rates demanded by investors will be, and the more likely it is that any economic recovery will be stalled.

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Fed Chairman Ben Bernanke told CBS News in March that he saw "green shoots" of economic recovery beginning to sprout, including in mortgages and business lending.

Now it seems like those "green shoots" that were beginning to appear may have been rooted in inflation.

Thanks to a combination of influences, including increased jitters on the part of investors and the Fed's decision to print large quantities of money, there's more reason than there was a few months ago to worry about a spate of inflation.

The U.S. dollar has fallen 10 percent since reaching a three-year high in March. Gold is up, commodities are up, and crude oil prices have roughly doubled this year. And the possibility of a debt downgrade for Britain, one of the few nations with a triple-A credit rating -- has shown that no currency is invulnerable.

Bill Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, said on Thursday that the United States' own triple-A credit rating will "eventually" be lost as well. "The markets are beginning to anticipate the possibility of" a downgrade, Gross said, according to Bloomberg News.

If this sounds obscure, especially when most of the recent talk has been about deflation, you're not alone. But let's walk through some of the implications...

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Some beams of sunlight have begun to peek through the economic storm clouds, raising the possibility that the Great Recession that started in late 2007 may be nearing an end. Or is that a hailstorm on the horizon?

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