Paul Versus Joe




Paul Krugman (PK) and Joe Scarborough (JS) have been having an on-air feud of late. The issue is debt, spending and inflation . The two have been going at each other on their blogs: Here, Here, Here and Here.

The bottom line is that PK thinks debt is no problem at all; nothing should be done with spending, and absolutely nothing should be done with America's entitlement programs. JS, sees it differently. He points to the country's $60T of unfunded liabilities, another decade of trillion dollar deficits and the very real chance that high inflation is the outcome.


Atlantic magazine (Egad!) has jumped into this fray with both feet (Link). The folks at Atlantic love PK, and they too see no problems at all. The Mag did its best to take JS down with his silly concerns.




In defense of its position, The Atlantic offered up the following chart on the 10-year TIPS implied forecast for inflation:




The Atlantic had this to say about the market's inflation outlook:


Core PCE inflation averaged 1.9 percent over this period, while 10-year breakevens, which tell us market expectations of future inflation, averaged 2.18 percent.


Yes, inflation expectations averaged 2.18%, but the only relevant question is - What are those expectations today?" The TIPS spread is now pricing in 2.56% inflation (15% above the ten-year average) The folks at Atlantic looked at the TIPS info and concluded:


If markets feared future inflation in the face of mounting debt, they sure had a funny way of showing it.


I look at the TIPS chart and come away with a different take than the Atlantic. What I see isn't so "funny". We are approaching the highs for the past decade. The past few years have seen a steady increase in expectations. If you drew a trend line for the past two years, it would point you to an upside breakout for inflation expectations.


What is the main factor pushing up inflation expectations? It's the Fed, of course. The stated policy of Bernanke to increase inflation. The Fed is currently at Full Speed with money creation. There is no end in sight for QE and ZIRP. It's not just the US that is pushing the inflation button. Japan and England have an oar in this water. China is on a tear. I think the EU is not far away from its own QE experiment. Yet the Atlantic concludes the opposite.


The Atlantic should know that it's foolish to Fight the Fed. The Fed is going to win; higher inflation is a sure thing. The TIPS market is the best indication of this. I think it's the Atlantic that could use a lesson on markets and the economy.