rate of inflation

With Unchecked U.S. Spending, It's Time to Hedge Against Inflation

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Uncontrolled government spending could force the Fed to monetize the government's debt, creating runaway inflation, former Federal Reserve Governor Frederic Mishkin warned in a report.

If these circumstances were to occur, the Fed would be unable to do much, if anything, to control inflation, Mishkin said in the report, presented at a conference at the University of Chicago Booth School of Business.

In that case, Mishkin and his co-authors, David Greenlaw, James Hamilton and Peter Hooper, argue that the result could be "a flight from the dollar," according to a summary of the report by noted Fed-watcher Steven K. Beckner writing for MNI.

The report states, "Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates, which in turn make the debt problems more severe ... Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics."

The authors of the report estimate U.S. net debt, excluding debt held by the Social Security Trust Fund, at about 80% of GDP in 2011, double what it was a few years before. To make matters worse, the United States runs a persistent current account deficit, which is funded by borrowing from other countries.

This puts the U.S. in a worse spot than Japan which, although its debt is much higher as a percentage of GDP, has a large current account surplus and a high savings rate.

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Not Much of a Debate: Inflation is Part of the Plan

Forget about lost decades. Forecasts that we'll be turning Japanese couldn't be further from the truth.

Here's why.

It's simple, really. Deflation is not in the interest of anybody in power, so it's very unlikely to happen.

The U.S. Federal Reserve's policy move to target inflation last week just re-emphasizes this point.

That's not to say deflation is a bad thing for everybody.

For savers and those living on fixed incomes, deflation would be a very good thing indeed.

Their income would gradually increase in real terms, and their savings would become steadily more valuable. Holders of Treasury bonds would also gain mightily from deflation.

However, the very people who would gain from deflation are not in power.

The People's Bank of China can't vote in the U.S. (yet!), Ron Paul is not president, and there is not an organized and powerful savers' political movement. After all, this is not Germany or Japan!

Meanwhile, in the real world, the U.S. government is spending far more than it takes in, and its debt is rising to dangerous levels. This has been happening on a bipartisan basis since at least 2001.

The Tea Party may have elected a Congress committed to reducing spending, but none of the battles of 2011 actually reduced spending - they just slowed the rate of growth somewhat.

Since much of the debt is borrowed long-term at low interest rates, the best way to reduce its burden on future generations is to encourage inflation.

Savers may lose out on the deal, but to those in Washington, the idea of inflating our way out of debt is irresistible.

Of course, sometimes we can depend on an independent central bank to resist this temptation. But at present, Fed Chairman Ben Bernanke is committed to near-zero interest rates in his fight against deflation.

Now you don't have to be a conspiracy theorist to realize that, if the power structure is committed to at least moderate inflation, inflation is what you are going to get.

In fact, it is already brewing.



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Gold Will Continue to Shine Amid Market Uncertainty

The U.S. consumer price index rose 0.5% in February from the month before, pushed higher by food and energy costs. The price index for all items climbed 2.1% over the past year.

But many think government-reported inflation numbers don't present an accurate price picture. Some economists estimate the true rate of inflation is closer to 8% or 9%. And those numbers could rise higher as the U.S. Federal Reserve continues to pump billions of dollars into the financial system.

Inflation, coupled with political turmoil in the Middle East, has pushed many investors out of stocks and into commodities. Gold rose to a record $1,445.70 an ounce on March 7. Market uncertainty from the Japan disaster pushed the metal down to $1,380.70 on March 15, but it gained again this week to hover around $1,400 an ounce.

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Hidden Inflation: Why Prices Are Rising Faster Than You Think

Rising prices are hitting U.S. consumers a lot harder than the U.S. Federal Reserve - or the U.S. government - would have us believe. The government-issued consumer price index (CPI) for January showed that "core inflation" - which includes prices for all items except food and energy - was up only 1% from the same month the year before.

By excluding food and energy prices, as volatile as they may be, the CPI fails to convey the pain that rising prices are inflicting on American households. Indeed, some economists have claimed that the true rate of inflation is closer to 8% or 9%.

To get a true picture of the current inflation situation - and to understand its impact and potential dangers (as well as several investment opportunities) - Money Morning Executive Editor William Patalon III sat down with Chief Investment Strategist Keith Fitz-Gerald for a question-and-answer session on the topic.

For three inflation-fighting investments, please read on....

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