With the unemployment rate at 8 percent plus and after having the government put trillions of dollars into the economy in the form of stimulus, recovery and shovel read jobs, is high inflation next? Mohamed El-Erian, Pimco’s CEO believes that the Fed wants just that. Pimco is a large bonding company, Mr. El-Erian’s company could benefit from people wanting to buy bonds, but his suggestions are ominous. The US has issued so many bonds in the effort to buoy up the economy by keeping interest rates low, rescuing “too big to fail” corporations, paying for so many expanding programs, and to pay for additional debt that the US government is taking on.
The bond market includes bonds from corporations, cities, states, and counties. US Bonds have always been the safety net for investors seeking no risk. Bonds have been known and a desired vehicle to safeguard one’s money, especially during inflation or during periods of high interest rates. But with so many US Bonds in the market, almost to the point of flooding, would the bond market demand curve really move, or would just the quantity and price move along the same demand curve? Will the Federal Reserve be able to balance inflation and encourage growth? I think that we are heading into uncharted waters with this one.