If it's not one thing, it's inflation

I wouldn't exactly call it breaking news, but it was good to see consensus among the G8 that inflationary pressures were now the biggest threat to economic growth worldwide. The credit crisis certainly has worked to send many of the largest economies into a tailspin, the US most notably, but the persisting pressure of higher oil and commodity prices threatens to keep these same economies from any sort of near-future recovery.

Oil hit $139.12 per barrel on June 6, 2008; an all-time high. Commodity prices, like wheat, for example, have seen prices double in the past year. On a personal note, I can confirm that I've seen the price of whole wheat flour literally double in a matter of weeks at my local supermarket. While commodity prices represent a relatively small proportion of household spending (food, in general, may only see single digit-increases), the combination of these rising prices with declining home equity and accelerating unemployment figures paints a very black picture for the future.

It's a positive thing to note the G8's consensus, but worrying still is what actions will result from that consensus. To slow inflation, central banks will begin to raise interest rates. While many would tend to agree that this is long-overdue, the current state of the world economy as generally weak and slowing, will likely mean that in doing so, the higher cost of capital will only affirm the recessionary tendencies and result in a very, very slow recovery.

Paulson: Deny, deny, deny. Ok, but it's over!

Treasury secretary, Henry Paulson, is being lambasted for his glass-is-half-full approach to reporting on the state of the economy and the role of the financial markets going forward. While Mr. Paulson has been denying any serious problems in the capital markets, he's finally admitted that there was a problem, but that it's now over ...how convenient.

I'm very much aware that politicians need to put a positive spin on even the worst scenarios in order to keep people from panicking, but Mr. Paulson's approach has worked to to make him less than credible. I've been equally critical of Fed Chairman Ben Bernanke, but at least he both acknowledged and acted to quell credit crunch. Mr. Paulson has been adamant about denying the realities faced by both business and consumer until we reached a point in this down-cycle that appears, to Mr. Paulson, to be a turning-point. The reality, of course, is likely not all that rosy, which will only work to further discredit Mr. Paulson as reliable source for information on the state of the economy.

To be fair, Mr. Paulson is not saying that the economy is rebounding, but that the capital markets will play less of a role - replaced by the forces at-play in the housing and commodities markets.

"We are seeing signs of progress as capital and credit markets stabilize,'' Paulson said. "The markets are considerably calmer now than they were in March.''

He goes on to say...

"We will continue to look for additional tools to reach and help homeowners and to make existing programs work more smoothly,'' he said, cautioning that more declines may occur in months ahead. ``We know the correction has further to go, and so we should not be surprised at headlines that note rising foreclosures and falling home prices.''

So, at least he doesn't have a problem admitting that we do, in fact, have some problems in the housing market. As per my earlier posts, the Democrats are working to introduce legislation to help homeowners in much the same way as the Fed has helped financial institutions. The question will be wether it's too little too late.