A great read in Business Week entitled the Fed's Mortgage Muddle. It hits on many points that I have been writing and talking about. Thanks Goes to Peter.
Here's a feedback loop that nobody expected: It looks like investors' expectations for an economic recovery could end up delaying that very scenario.
Umm no. At the risk of sounding self promoting I have talked and written about that numerous times. My line is that deflation will lead to inflation. Not inflation fears will lead to inflation or even inflation will lead to inflation. The government has not printed enough money to start hyperinflation. They have shown they are committed to doing so. In the coming years if a major country defaults (i.e. Great Britain or Switzerland) the Fed will print tons of money to try of offset the near term deflationary forces. Or when (I would say when not if) Citigroup is finally nationalized the government will print tons of money to swallow the balance sheet. Those deflationary forces will cause (I should say the Fed will choose incorrectly) the Fed to massively lead to inflationary actions. When the market is crumbling during this time period. That is when you go all in because massive inflation will be close.
Fear of inflation and concerns over the long-term impact of ballooning government debt have been driving up yields on 10-year U.S. Treasury notes, which reached 3.91% on June 8 before easing back to 3.84% the next day.
That is why inflation fears can't lead to inflation. At least not now. It will prevent the inflation from occurring as it will cause the velocity of money to slow further as the economy slows due to higher raw material costs and higher borrowing costs creating more deflation eventually leading to the inflation. Get all that?
The whole article is a good read in understanding how inflation fears will stop inflation though it doesn't word it in this way. Talks about 30 year mortgage rates, refinancing activity, and foreclosure problems.