Commodity prices are rising, gold is rising, and currencies of commodity exporting nations such as Canada have soared against the U.S. dollar in the past few months.
Despite all the fears of deflationary collapse in the United States, despite all the evidence that housing prices are still on the decline, and that commercial real estate values are following housing downward, despite the fact that unemployment is still rising (though not as fast as previously), despite the fact that a record number of Americans -- 32.2 million -- are using food stamps to help buy groceries, and despite the despair among auto workers and auto parts suppliers . . . . all signs of a deflationary collapse . . .
Despite all of this, there is a whiff of inflation in the air!
You can see it in gold prices, which at $960 an ounce are $82 higher than a year ago. You can see it in energy prices, especially oil. It was barely a year ago that crude oil hit $140 a barrel, then subsequently collapsed to $30 a barrel in winter. Oil has recently jumped to over $68/bbl.-- and Goldman Sachs is predicting $85 by the end of the year.
You can see the fear of inflation in the relationship between the United States dollar and the Canadian dollar, which was trading under 80 cents two months ago, and now is 92 cents. Yes, the Ontario manufacturing economy is hit hard by the auto manufacturing crisis. Still the Canadian dollar increases in value against the U.S. currency -- because they are not only oil exporters but a rich source of agricultural commodities -- and even water! (Note: It's entirely possible that water will one day be more valuable than gold, since you can't drink gold!)
But most especially you can see the whiff of inflation in the interest rate markets. As the Treasury must sell more and more bills, notes and bonds to fund its growing deficits, the market is demanding they pay higher interest rates to compensate for expected devaluation of the dollar through inflation.
The 10-year Treasury note is yielding nearly 4 percent -- almost double the yield of just months ago. And since mortgage rates are based on the 10-year Treasury rate, set at market auctions, a fixed rate mortgage is becoming more expensive. These home loan rates are typically set at 2 percentage points over the 10-year yield. A little simple math tells you that the 5 percent fixed-rate mortgage is disappearing fast.
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