My Mortgage Blog

Financial markets are on sharp edges despite the absence of significant economic data. This shutdown foolishness holds media center-stage, but that’s not what’s on the minds of markets. One thing there towers over all: we’re either entering a spate of global inflation, central banks late to the party, or we’re not.
     
The 10-year T-note is out of bounds, up at 3.60%, taking mortgages above 5.00%. Japan and Libya forgotten, oil is $111/bbl, gold $1468/oz, and silver $40/oz. That gold price is more than double the cost of new production, and silver easily quadruple -- the sign that “momentum” traders are chasing each others’ tails. If we are ramping to global inflation, those tails are a good catch.
     
If this episode is a replay of the summer of 2008, the momentum boys are going to end up with a mouthful of fur and look really, really silly.
     
Limits on an inflation outbreak have been thought to be the following. The US is more in recession than recovery, wages not growing at all while rising costs of energy, food, and health insurance keep consumers on the ropes. All still true.
     
Europe was supposed to be on the edge of a new Club Med debt meltdown. Instead, the new Irish government says all-okay-we’ll-pay, Portugal will be bailed and accept the same vow of perpetual poverty not going well in Greece, and nobody wants to know what’s under Spanish covers. Is Europe really okay after all, or is the ECB tightening a suicidal sop to the Germans? Whether they’re okay or not, if they can kick the can far enough, European growth adds to global heat and possible inflation.
     
In the emerging nations, so long as they maintained undervalued currencies, then inflation was inevitable -- but was supposed to be confined there. As they were forced to raise domestic interest rates, their currencies would at last rise and slow them down. Brazil’s real has broken upward, almost 10% in two weeks, maybe a trend-setter. However, early in a general revaluation of emerging currencies, all their exports would rise in price, adding inflation fuel, the long-run slowing over the horizon.
     
I’m going to stick with Plan A: the US economy is far too weak for global inflation to get going. Perfesser Bernanke is right: here, cost increases are transient, shifting US patterns of consumption instead of raising the general price level.
     
A good friend and smart money runner (Gary Beels) gives his clients this inflation reminder: when ‘Boomers were kids in the ‘50s, first class postage was three cents (went to four in ’58). The 15-fold increase to today’s $.44 is not far off the 12-times increase in CPI since ‘55. However... today we can send letters at zero marginal cost and instant delivery. In ’55 a “long-distance call” to Grandma on Sunday cost three bucks in those dollars, nearly forty of today’s -- but today, that call costs nothing.
     
Inflation bites into economic growth in strange ways, different times. In Colorado the cost of health insurance has risen more than 10% in each of the last ten years. Murder. Gasoline is weirdest of all: 1955’s 25-cents-per-gallon gas in today’s dollars cost three bucks, then fell steadily in real terms until 1997. We feel pain today because the cost has doubled since ’97 versus incomes unchanged for most citizens.
     
     
Shutdown. Congress first began to balk at increasing the debt limit back in ’82, and voting then took on kabuki charade until Gingrich’s shutdown try in ’95. Worries for US bankruptcy then were minor, and Bill Clinton left Newt and his buddies without their shoes. Today the debt threat is real, and frightened people will support dumb things.
     
A temporary shutdown is not dangerous. The hazard lies in righteousness.
     
Our fiscal gulf is too big to bridge even if either party were granted its every wish. No conceivable taxation of Republicans by Democrats, nor Republican cuts of spending on Democrats will get it done. Neither party nor the President will deal with the cost of health care. Yet all have deep conviction of their moral superiority over the others.
     
Next week we mark the 150th anniversary of Fort Sumter. That was the last time this country was divided by such great moral certainty, and contempt for our fellows.