It is no surprise that the primary question clients currently field is, "How high is inflation rising?"

Many remember the late 1970s and early 1980s when inflation was about 14%. With the Obama administration and Congress spending at the highest rate in our country's history, this topic is front and center in clients' concerns. After the meltdown of the baby boomer's portfolios this past year, a second blast from inflation would severely erode their purchasing power. Not all of our clients bailed to fixed income, but many investors did. If inflation returns, their new, bond-heavy portfolios would suffer, and investor confidence in the capital markets would plunge. I encourage advisors to understand inflation and its root causes.   More 

Last year, as government firefighters sprayed massive quantities of money at financial institutions threatening the rest of us with calamity, I had a brief talk with my sister Katie. She talked about forestry management, and how forest fires are frequently best left alone, as natural processes promote healthy forests and growth in the long run. They clear out kindling that can lead to the Big One down the road.

In the Financial Times, William White, formerly with the Bank for International Settlements, uses the forestry management example to argue that the successive monetary and fiscal easing after previous financial crises, and the reaction to our latest one, may actually seed bigger future crises.   More 

A brief addendum to my previous pieces on inflation and quantitative easing.

The latest Financial Highlight from the Federal Reserve Bank of Atlanta decomposes the Fed's purchases of Treasury securities by maturity. Half of these Treasury purchases have maturity between four and 10 years. Treasury purchases are a hefty part of the Fed balance sheet.

Therefore, if the Fed does nothing and just lets these bonds expire, it will drain liquidity from the system and consequently limit the monetary base in four to 10 years, which is when I thought that higher-than-average inflation would be a realistic scenario.   More 

The wagers on prediction markets such as Intrade astutely suggested several weeks ago that Fed Chairman Ben Bernanke would get a second term. Now that it looks like he will, we can turn our attention to a more economically fundamental prediction market to get an indication of what Bernanke has in mind on rates policy. The Fed has indicated it will maintain its target low for the Fed Funds rate, but some have speculated that economic stimulus measures, when combined with the so-called "green shoots" of early signs of economic recovery, might force the Fed's hand toward a sooner-than-expected rate hike.   More 

Many of the news media reports about President Barack Obama's nomination of Ben Bernanke to serve another term as chairman of the Board of Governors of the Federal Reserve System seemed to imply that it was a done deal. That was my impression looking at stories and headlines in a few prominent places. They seemed like they were taking it for granted that we live in a constitutional system with checks and balances, with a separation of powers, not a kingdom. This was a nomination that requires confirmation in the U.S. Senate. Granted, that may be more likely than not, but there's nothing wrong with a little deliberation.