LOW INFLATION AND PUMPING AIR

Mohammed El-Erian, the ex-Pimco guru, who spends  much of his time now writing articles for Bloomberg and the Financial Times, a nice gig if one can get it, in today's FT penned a piece about what seems these days everyone's favorite topic, deflation versus inflation.

To begin with, most didn't expect the flattening yield curve that's been riding herd on the market since the start of the year. Nor did they expect the small cap slowdown, to name just one of many other surprises.

El-Erian lists three things, lack of European and American economic growth; US Fed choosing to ignore jobs and other data, saying they will keep interest rates low for time being and that few traders were ready for these low rates let along a flat yield curve.

With the above in mind here's a quote, noting that the most important sentences here are the first and the last rather tortuous one.

In theory, there is little to worry about as lower interest rates should be self-correcting on all three counts. By reducing mortgage rates, they increase house affordability and, for existing homeowners, the incentive to refinance mortgages--both of which support homes prices and housing activity. They also push investors out of bond holdings and into riskier assets.

Indeed, this is the main objective of the 'unconventional policies' pursued by leading central banks, in the hope that the resulting price surge in risky assets makes households and businesses feel better, encouraging greater consumption and higher investments (via energized "animal spirits").

The little to worry about should start you worrying big time. Anytime you hear in theory, it's like when the girl says, "You're a really nice guy, but...."  Look out for that but. It's a damage control term as in "Well, we did try to warn you.".

Don't lose any sleep, just be aware that bureaucrats are running this show. Any day now one may be appearing at a theater or VA Medical Center near you saying, "I'm a bureaucrat and I'm here to help you."

In our recent post, "Cooking With Stealth," we wrote the following.

The whole thing smells of an economic scam to keep the eyes of working folks off inflation and declining purchasing power. In some circles it's referred to as highway robbery by stealth.

Now go back and reread Mr. El-Erian's first and last sentences. As we said, it's nice work if one can get it. And you listen carefully you can hear the air being pumped.