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The White House hasnt finalized their plans, be it the TARP, TALF or PPIP and pundits of all stripes are debating the impact on our fiscal position, the dollar and general demand.  It really is very difficult to guess what will happen, but one thing is highly likely: the return of inflation and the debut of a bond bear market.

I need to dig up the graphs on M1 and M2 and the budget deficist and post them later because theyreally show an uptick in the manufacture of money.  This is something that the White House has little power to influence.  While pursuing the Keynesian grail, the Fed has really pumped an enormous amount of liquidity into the system, the recent uptick in consumer savings notwithstanding.  Currently the banking system is constipated with this liquidity as banks continue to ration, nay, hoard, credit.  Assuming the recent fiscal stimuli start to do the trick, banks should start lending again.  That release of capital combined with any demand generation could seriously press inflation upward.

The Treasury’s debt raising plan will drive interest rates higher, which may cool inflation. This relationship is vitally important to the US’ economic health and the bond market.


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