Inflation Genie Is Out...Does It Really Matter???

Source : Various Reports

I'm sure there is not a single source that needs to be listed for this. People don't have to look far beyond their monthly expenses to see that inflation is through the roof. While everyone seems to be focussed on whether the economy is in a recession or headed for one, the federal reserve seems to be caught up in a mess of their own creation... a severe housing deflation on one hand and excessive inflation due to the massive liquidity infusion measures (be it rapid interest rate cuts, various hip-hop acronyms for liquidity injections and bail-out talk and backstops). One of the most important achievements of the Bernanke led fed is the conversion of "efficient" markets to "risk-free" markets.

The fine print on investment banks products seems to be replaced by a bold new statement ("We are too big to fail and have full faith and support of the US federal reserve and backed by the US tax payer in our daily operations and investment choices").

One of the questions is absolutely whether the federal reserve got in way too early in the deflation cycle and let the inflation genie get out way too rapidly?

I'll not try to answer that question or debate about but take a up a different one .. Is this Inflation really important in the grand scheme of things (I won't make any effort to say how to solve it either - thats the federal reserves job)... At the heart of the problem in the housing deflation seems to be affordability i.e. borrowers can be classified to fall into one of the following categories.

1. Borrowers that took on more debt than they could afford to repay.
2. Borrowers that owe more than their home is worth.
3. Borrowers that were financially balanced and were considered the prime/prudent ones.

It is these 3 types of borrower classes that are at the heart of the deflation challenge. Each one has a different balance sheet but rising inflation in food and energy costs pushes the living cost higher and pushes them closer to default [border line cases will tip into default rather than being pushed outward].

In short, deflation impacts the perceived wealth whereas inflation impacts the actual wealth so by opting to let the inflation genie out and adding additional stress to the consumers back may be a self-inflicted wound by the federal reserve rather than a helpful choice.