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NC Uniqueness—Inflation (AT Gov’t Spending Now)
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2NC Uniqueness—Inflation (AT Gov’t Spending Now)Spending fears have eased—key to currency stability Alibaba News 6/10/09 [“FOREX-US dollar rises as fears over govt debt sales ease,” http://news.alibaba.com/article/detail/markets/100116748-1-forex-us-dollar-rises-fears-over.html] The U.S. dollar rose broadly on Wednesday as an auction of $19 billion in 10-year Treasury notes eased some investor fears about the United States' ability to sell long-term debt to help finance a ballooning budget deficit. The dollar fell earlier after Russia's central bank said it will diversify its currency reserves by cutting U.S. Treasury purchases and buying IMF-backed bonds. But analysts said any Russian plans to diversify away from dollars would take time. The Treasury Department sold 10-year notes at a high yield of 3.99 percent as part of a combined sale of $65 billion in government debt this week. Wednesday's auction was the first real test of the government's long-term borrowing ability since investors began to wonder last month whether its prized AAA credit rating may be living on borrowed time. "There were concerns about appetite for Treasuries. The results of this auction have put to rest those concerns for the time being and any peripheral fears about the dollar as a safe store of value have also been put aside," said Michael Woolfolk, senior currency strategist, at The Bank of New York Mellon in New York. "This is positive for the dollar overall." Traders also said the euro's rise to $1.4145 earlier triggered automatic sell orders that pushed it to $1.3915 before moving to $1.3980, down 0.6 percent on the day. The dollar extended gains after a Federal Reserve report on U.S. economic conditions, known as the Beige Book, said the economy was still weak but there were signs that the slide was easing. Woolfolk added the Fed report appeared to have prompted an increase in risk aversion that was giving further support to the greenback in afternoon trading. The dollar rose 0.8 percent to 98.22 yen, according to electronic trading platform EBS. HIGHER US YIELDS The dollar gained even as stocks and bonds sold off after the auction. Bonds extended losses after the debt sale, with the benchmark 10-year note yield rising to as much as 4.00 percent after the sale, its highest since October. 2NC Uniqueness—Now KT Fiscal D Previous spending is not responsive—economy is stabilizing. Fiscal D is key NOW LA Times 6/15/09 [“Let's heed Ben Bernanke's warning on getting back to 'balance',” http://www.latimes.com/news/opinion/editorials/la-ed-paygo15-2009jun15,0,5813297.story] The economy has shown sparks of life lately, with hopeful signs in the statistics about consumer spending, the housing market, new unemployment filings and the banking industry. Amid these encouraging readings, though, there are rumblings of bigger problems to come -- problems exacerbated by Washington's response to the recession. Noting the rapid debt increases caused by huge budget deficits, Federal Reserve Chairman Ben S. Bernanke warned the House Budget Committee that the country needs to "begin planning now for the restoration of fiscal balance" if it hopes to maintain the confidence of the financial markets. It makes sense to try to stimulate the economy with deficit spending during a downturn, particularly when it's as sharp as the one that began last year. The question today, though, is whether it's time for the feds to shift their focus from stimulus to restraint. At the very least, the administration and Congress should be laying the groundwork for the change in approach. But the steps they took last week in the direction of fiscal responsibility just aren't credible. Reduced spending now is key to preventing inflation Reuters 6/19/09 [“Fed's Hoenig says inflation a longer-term issue: report,” http://www.reuters.com/article/businessNews/idUSTRE55I2Y320090619] "We have put an enormous amount of liquidity into the system ... If it is allowed to remain indefinitely, and we keep a very low (interest) rate for an extended period of time, then we do risk an inflationary outbreak," Hoenig said. This threat might not necessarily emerge next year, he said, but even if it was only going to be a problem in three or four years' time, policy-makers could not afford to ignore it. "Some people think that is a long ways off. But in the context of history, that is very quick and I think it is something we need to be concerned about," he said.
The four-week average of claims has dropped by about 40,000 from nearly 659,000 in early April, its peak for the current recession. But many economists want to see it fall further. Bruce Kasman, chief economist at JPMorgan Chase & Co., said Tuesday that a drop in the four-week average to 580,000 by next month would be sufficient to declare the recession over. Kasman is chairman of the American Bankers Association's economic advisory committee, a group of economists for large banks that this week predicted the economy will recover in the third quarter. The Federal Reserve also expects the economy to begin growing again this year. First-time jobless claims are a measure of the pace of layoffs and are seen as a timely, if volatile, indicator of the economy's health. Initial claims stood at 390,000 a year ago.
"The economy will return to growth but not to health," Bruce Kasman, chief economist for JPMorgan Chase & Co. and chairman of the American Bankers Association's Economic Advisory Committee, said Tuesday. The committee, which includes economists from Wells Fargo & Co., PNC Financial Services Group, Morgan Stanley and others, expects gross domestic product to increase 0.5 percent in the July-September quarter, after falling a projected 1.8 percent in the April-June period. Federal Reserve Chairman Ben Bernanke also says the economy could recover by the end of this year. But jobs will remain scarce and the unemployment rate will keep rising even after the recovery begins, the committee said, peaking at 10 percent in the first three months of 2010. The rate will remain elevated through 2010, and will finish the year at 9.5 percent, the committee forecast. That would be above the current jobless rate of 9.4 percent. Still, consumer spending has stabilized after dropping sharply late last year, Kasman said, and businesses have cut inventories, which should lead to reduced layoffs. In addition, credit is more widely available than it was at the height of the crisis last winter due to the government's efforts to rescue the banks, he said. But a report from the Treasury Department Monday showed that lending by the 21 largest banks receiving federal bailout money dropped in April for the fifth time in six months. Total lending by those banks fell to $4.34 trillion, down 0.8 percent from March. The Obama administration's $787 billion stimulus package also is contributing to the recovery, Kasman said. The committee also expects the housing market to bottom this year and contribute to economic growth for the first time in several years. Home prices will be "modestly higher" next year, the committee said. Signs of recovery in the housing market appeared Tuesday as construction of new homes and apartments jumped 17.2 percent to an annual pace of 532,000 units. That was above analysts' expectations of 500,000 units. Still, the huge increase in the federal government's budget deficit, which is expected to reach nearly $1.85 trillion this year, could lead to higher interest rates after 2010. "There are clearly challenges and longer term problems that remain even as the economy recovers," Kasman said. But inflation should remain at bay, as consumer prices, excluding food and energy, drop about 1 percent by the end of this year, he said. Analysts polled by Thomson Reuters expect the Labor Department will report Wednesday that core inflation rose 1.8 percent in May from the previous year. The Producer Price Index, which measures price changes before they reach consumers, fell 5 percent in the 12 months ending in May, the Labor Department said Tuesday. That was the steepest drop in 60 years. The core PPI dropped 3 percent.
2NC Uniqueness—Invisible Inflation Threshold No inflation or deflation now—invisible threshold has to be avoided The Capital Spectator 6/3/09 [“NO SIGN OF INFLATION. SO WHY WORRY?” Lexis] Inflation's still not a risk but arguably neither is deflation. We're not quite ready to officially claim that the D risk has been vanquished, but we're close. As it turns out, we're not alone. The bond market is increasingly inclined to turn the page on the fear that a deflationary spiral may threaten. But if the deflation risk is passing, as it seems to be, the change doesn't mean that inflation is back. There's no switch that turns one off and the other on as cleanly as flicking on a light. The ebb and flow of the economy is a process, an evolution. What we're seeing now, or so it appears, is a transition from a heightened risk of deflation to the absence of that risk, which isn't to be confused with inflation. At least not yet. There's no law that says inflation must quickly follow deflation. But neither is there any force that prevents one from turning into the other. Much depends on what the central bank does; not today but next month, next year and beyond. Inflation, when it does bite, tends to creep up on you, slowly, quietly, working its way into the economy virtually unseen. It doesn't suddenly arrive one day with fanfare and press releases. More typically, the crowd wakes up one day and realizes that inflation is back. The good news is that there are usually early warning signs. Interest rates, money supply, commodity prices, and so on. The challenge is figuring out in real time what constitutes a legitimate warning vs. noise. For the moment, the market's telling us that deflation's a fading hazard. As the chart below shows, the implied inflation rate in the bond market (based on the yield spread between the nominal 10-year and inflation indexed Treasuries) was just under 2% as of last night's close. That's still comfortably below the 2.5% rate that prevailed before the financial system ran amuck starting last September. But it's also up sharply from the near-zero levels of December and January. That's not necessarily surprising or even troublesome. Fearing the worst last fall, the Fed quickly dropped short rates to near zero. The medicine appears to be working, which is to say that Bernanke and company are engineering higher prices. But it's the momentum we fear. Not necessarily today, but down the road. Some commentators say that all the talk of inflation is premature and perhaps misguided. In his last week in The New York Times, Paul Krugman advises readers that "when it comes to inflation, the only thing we have to fear is inflation fear itself." That's a reassuring thought, but unfortunately it runs contrary to the historical record. Maybe this time is different, but we don't know. But the past is certainly clear. Except for a few extraordinary examples to the contrary, inflation has been the norm. For the most part, it's been manageable, although sometimes it spins out of control, as it did in the 1970s and early 1980s. Recessions, of course, have a habit of pounding inflation back into the ground. Even after the current downturn ends, its after-effects are likely to put a lid on pricing pressures and so there's reason to be sanguine about future inflation threats. The ever-trenchant Martin Wolf advises in his FT column today that there's no economic basis to fear inflation, at least not now. "The jump in bond rates is a desirable normalisation after a panic," he writes. "Investors rushed into the dollar and government bonds. Now they are rushing out again." The question, of course, is when is it safe to start worrying about inflation? The implied inflation rate for the next 10 years is roughly 2%. That's low by historical standards and if it stayed there for the next generation the central bank could claim a well-deserved victory in maintaining price stability, at least by the standards of the 20th century. But no one knows if inflation will rise to, say, 2% and stay there or keep climbing. Again, much depends on what the central banks do from here on out. One can make an economic case that exploding government debt and massive liquidity injections aren't destined to raise inflation pressures, as Wolf and others explain. That's a reasonable view, but if you're charged with protecting assets, such claims that all's well aren't entirely persuasive. The bond market, along with the gold and forex markets, are discounting the future and all its risks and they're telling us that the risk of higher inflation is on the march. It's quite possible that the markets are wrong and so inflation will remain a shadow of its former self. Let's hope so. But there's no way of knowing for sure. Strategic-minded investors should hedge their bets. Inflation may remain benign, but it may not. The markets are struggling to put a price on this uncertainty. In any case, it's the trend rather than the absolute levels that worry investors. Estimating the true rate of inflation is always a contentious subject. But while we can all argue over the numbers, the trend is less obscure, and it's the trend that has some of us worried. Taking out a bit of insurance, then, seems reasonable. Should we bet that house on higher inflation? Of course not. But neither should we discount it entirely. It may be different this time, but 300 years of central banking keeps us wary on buying into yet another argument that a new era has arrived. 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