Open Thread: The Return of Stagflation?

Stagfl_20080220
From the front page of tomorrow’s WSJ, comes this charming article:

"The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about "stagflation," a condition not seen since the 1970s.

Inflation is rising. Yesterday the Labor Department said consumer prices in the U.S. jumped 0.4% in January and are up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up by 2.5% from the previous year, a 10-month high.

The same day brought news that sparked worries of a deepening recession. The Federal Reserve disclosed that its policymakers lowered their forecast for economic growth this year to between 1.3% and 2%, half a percentage point below the level of their previous forecast, in October. They blamed a further intensification on the slump in housing prices, tighter lending standards and higher oil prices. They warned that should the economy’s performance differ from its revised forecast, it would be more likely to fall short than outperform."

Of course, none of this is news to any one who has been paying attention (i.e., regular TBP readers). Over the past few years, we have taken to calling the current condition demi-stagflation. Not nearly as bad as the 1970s, but certainly worrisome enough.

The Journal also asked readers: Is the U.S. in a period of stagflation? I found the poll results surprising: Its a full 180 from what we had been hearing from the politicos and pundits: We went from a rather robust denial of inflation, and steadfast defense of growth, to this:

Stag_vote

(Let’s see if this changes when more votes come in . . .)
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Tonite’s open thread question: Is Stagflation really back? How much worse is it going to get? Will it be anything like the 1970s (only  without the polyester and disco)?

What say ye?

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Source:
Fears of Stagflation Return As Price Increases Gain Pace
Fed Cuts Outlook For Economic Growth As Credit Tightens
GREG IP
WSJ, February 21, 2008
http://online.wsj.com/article/SB120355396795281551.html

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What's been said:

Discussions found on the web:
  1. scorpio commented on Feb 20

    the disco would be a plus. line-dancing may be the only way we make it through the next few years

  2. Chief Tomahawk commented on Feb 20

    HA!

    I’m gonna cut the Hunt brothers off at the pass and buy up silver now….

    That and wheat!

  3. wunsacon commented on Feb 20

    As coined by other posters (or elsewhere on the net), I expect it to remain “biflation”: wages go down or stay the same (in the US) while necessities increase in price.

    At some point, perhaps after a few years, wages will start rising. At that point, we’ll raise rates.

    On the one hand, it seems unfair that — after creating/contributing to a bubble benefiting speculators and Wall Street — the only “inflation” the Fed cares about is wage inflation. On the other, since one of their mandates is “help the economy grow (to the extent of its capacity for growth, which in part is limited by “available labor”), then it makes sense to ease credit to promote growth in the presence of weakening employment. And vice versa.

    As necessities grow more expensive, some labor (and capital) will be diverted to produce more. (E.g., higher grain and gold prices indeed spurs more production, perhaps using the labor and capital from recent casualties like mortgage brokerages and The Sharper Image.)

  4. j-daddy commented on Feb 20

    Commodities could be getting bid-up in excess of what dollar devaluation would justify, which means we’re watching a footrace between the market’s perception of inflation and its recognition of the productive downturn we’re clearly entering.
    Demand dynamics don’t justify the run-up in oil, but it will take a while for recession to drag down demand.

  5. Steve Barry commented on Feb 20

    Good news…the US Gov’t can’t afford to continue the economic indicator service but the Shadow Gov’t Website can.

    Economic Indicators

  6. nades commented on Feb 20

    I’m not economist by any means but I’m scared as hell of the rising cost of imports, via the shrinking dollar, and rising unemployment. I think it could really be a reinforcing cycle where we’re all in trouble…

    (Disclaimer: I’ve always been a bit paranoid!:))

  7. Eclectic commented on Feb 20

    There’s the potential for developing stagflation, but you’ll know it when it happens… and it ain’t yet happened.

    It’s like sin. Everybody knows what it is.

  8. km4 commented on Feb 20

    Stagflation like we’ve not seen before is coming to America.

    Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is.

    Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse.

    The US has been the main culprit behind the destabilising global imbalances of recent years and its massive current account deficit absorbs about 75 per cent of the world’s surplus saving

    Combine this with the cost of Bush to America since 2000 which is $32 Trillion dollars in total liabilities and unfunded commitments for future payments.

    The implications….

    GAO Comptroller General David Walker who recently resigned.

    “If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and some people would be talking about whether the company’s management directors needed a major shake-up”.

    “The federal government’s total liabilities,” Walker explained, “translates into a de facto mortgage of about $455,000 for every American household and there’s no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.”

  9. Paul Jones commented on Feb 20

    America is facing massive retrenchment AND inflation, not stagflation.

    Social turbulence is an inevitable byproduct.

    Buckle up.

  10. P. K. commented on Feb 20

    It sure will be a different kind of stagflation. Now there’s a much less unionized (weaker) workforce, and the inflation formula was changed, resulting in lower reported #’s. That’s the “flation” part.

    As for the “stag” part, how cyclical is a service economy compared to the producing one we had back then?

  11. yoshi commented on Feb 20

    The problem with polls like this is that it only appeals to people that read your blog and in most cases agree with you – which automatically introduces a bias in the results (its like the American family association kicking out a poll about gays).

    Here is my perspective on all this – I survived the 70s, I survived the 80s, I survived the 90s, I have so far survived this century … so let me ask you in all seriousness: what the fuck do I care about stagflation now? In ten years – I will be reminiscing about this. You will still be pissed off at Best Buy.

  12. MrMarket commented on Feb 20

    2+Billion people are in the process of industrialization…The FED has dropped and dropped and dropped rates AND cranked the printing presses for years…

    Huge demand for limited supply of goods…while we are debasing our currency/economy…

    The real surprise is that there is someone out there what is surprised by this!

    Save yourself ’cause Boom Boom can’t!

  13. Dave M commented on Feb 20

    a guy named Chris Farrel penned a book called Deflation a few years ago. It’s a good primer. The book suggests you look at where the inflation is living in the economy and where deflation is developing. By that perspective, and it makes sense, deflation will eventually overpower the inflationary dynamics in commodities. It’s hard to see right now if you just shop for food regularly but it is not hard to imagine if you appreciate just how much leverage carry trades levitated all of our perspectives by and just how fast it could all unwind if the Fed’s unusual measures do not reverse the trend in risk aversion. This could easily take a while to manifest but even if it does take a year or even two, the pain in the meantime will be terrible.
    The part that really concerns me is when I look at how Japan’s deflationary mess was mitigated by foreign demand. I do not think we will have that luxury in any way that is comparable.

  14. sanjosie commented on Feb 20

    Having lived through the 70’s bought with stagflation.

    Back then…

    It starts slowly. In ’69, I was walking to class as a freshman. The explosiveness of increases in input prices and wages was dawning on me. It’s not just simple linear arithmetic.

    Things build. Catching up to past inflation is on your mind while you’re also trying to build in cushions against expected price increases.

    Relationships get distorted, inventory builds as stockpiles are built to forestall the effects of future price increases – defensive buying.

    Needs and wants are questioned – “I can’t believe they think people will pay that much”

    House prices were inflating – people were coveting that appreciation in the 70’s.

    Fundamental state changes occurred – two oil embargoes shocked the system. The dollar gold peg was disavowed.

    Jimmy Carter said we’d have to get by on less.

    The US was a creditor nation.

    Now …

    What will be the fundamental shocks? Monetary disorder. Peak oil. Gold becomes money again. The forever war.

    Housing is deflating.

    Again the Fed is exacerbating the onset of inflation, by cutting interest rates, Arthur Burns deja vu.

    Wages aren’t increasing. My rent is $900 higher but my salary is the same as in 2000.

    The Chinese stockpile commodities to forestall the effects of price increases.

    The US is a debtor nation.

  15. donna commented on Feb 20

    Can we just put the shadow government in charge already? I’ve seen more good ideas about what to do from the bloggers than from anyone “in charge”.

    Seriously.

  16. DMR commented on Feb 20

    Anybody else notice how noisy the inflation data becomes after 2003?

  17. jz commented on Feb 20

    I wonder why the inflation number was big news. Did people not know that food and energy was higher?

    One of two things is going to happen: oil is going to go so high and cause a recession which will lead to lower oil prices. Or lower oil prices will head off a recession. Either way, inflation is not going to be a problem.

    It amazes me that home prices climbed and were never figured into inflation, and now they fall, and that figures in as well.

    To me, the big story has been asset deflation not inflation. Lower demand can lead to lower prices, and the U.S. just like Japan is getting much older. Not one economist has figured this out yet.

  18. donna commented on Feb 20

    Oh, and what’s different is in the 70s we had this thing called SAVINGS.

    Sure, we were pissed that they were worth less and less, but it helped. Now? I’m watching friends not be able to pay their rent and car payments, and not being able to find work. I’m watching lots of kids moving back home with their parents AND watching CA’s governor cutting education just when these kids have no jobs. What do they expect the kids to DO, anyway?!

  19. Street Creds commented on Feb 20

    Chief Tomahawk,
    thats not funny, I was long silver with the Hunt Bros. at the time and had my ass handed to me when they bailed. I barely had enough money to open another margin account.

  20. bsneath commented on Feb 20

    After many years of excess consumption, using borrowed money, we now need to repay our global debts.

    The Fed must rapidly lower interest rates, the dollar will fall, prices of imports and global commodities will rise, less will be consumed & what is consumed will be domestic where possible, and more of what we grow, mine & make will be for export. At this point there is no alternative but to muddle through the next decade while we unwind the imbalances in our economy.

    Even if the economy as a whole grows, it will feel like a recession to the average consumer whose living standards will be lowered.

    On the other hand, if you are a wheat farmer in Nebraska……

  21. Sammy20 commented on Feb 20

    I think saying inflation is “not nearly as bad” as the 70’s is misleading. If this current methodology was used in the 70’s, CPI would probably only be running in the 4-6% range.

    The only difference we have now is that instead of all prices rising at relatively the same time, we have super bubbles that are simply cycling from one thing to the other.

    I can’t believe this point isn’t brought up every time someone says this is not like the 70’s. Housing inflation is/was much worse than the 70’s. Oil is now comparable and most other items of need are closing in. I have a feeling gold will be there before we know it as well.

  22. Tom Durff commented on Feb 20

    Concern about stagflation is off the mark.

    There is just no comparing the current amount of debt at all levels with the debt ratios that existed in the 1970’s. If debt/leverage continues to unwind at the current pace or faster, we will be very lucky if stagflation is our top concern a year from now.

  23. Marcus Aurelius commented on Feb 20

    “The federal government’s total liabilities,” Walker explained, “translates into a de facto mortgage of about $455,000 for every American household and there’s no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.”

    Posted by: km4 | Feb 20, 2008 9:38:50 PM

    ____

    I think there’s a word for that…

  24. j-daddy commented on Feb 20

    Re Dave M’s comment: the Fed’s very efforts to reverse the trend in risk aversion are contributing to the risk aversion.
    The equity markets are taking heart from the easing, but the high yield market is shut down and the bank debt market is getting worse by the day.

  25. Jackson commented on Feb 20

    I think stagflation is a bit generous, as the first part of that implies stagnation. We are actually staring down the barrel of a serious retrenchment; unfortunately, re-flation just doesn’t have much of a ring to it.

    I nominate the combination of crippling long-term recession and inflation to be called “Barryflation”.

  26. ronyregan commented on Feb 20

    Stagflation? are we not getting a little ahead of ourselves :) or could it be DE-flation?

    But Heck….what’s the diff….global warming, bigfoot, or the Loch Ness monster will get us all before then!

    lol

  27. Francois commented on Feb 20

    “On the one hand, it seems unfair that — after creating/contributing to a bubble benefiting speculators and Wall Street — the only “inflation” the Fed cares about is wage inflation.”

    It only “seems unfair”? Why is it not plain unfair? I’m no economist but I’d like to see some proof that wage inflation is so dangerous to “growth”.

    In an economy dominated by consumption, how can wage increases be that horrible? If credit hasn’t been that easy in the last decade, consumers would have gotten on strike much sooner and the very concept of wage inflation as the economy’s bogeyman would have met his Maker.

    IMO, one of the biggest sources of rising prices in our economy come from the distortions inflicted to a true free market. Case in point: when widgets are in demand, prices rise, more competitors get into the widgets market, production goes up, prices come down. However, there are countless more financial services today than 30 years ago, much more companies present in the field, yet, prices and fees just won’t quit rising.

    WTF??

  28. Stuart commented on Feb 20

    $1 million in a stack of $100 bills is 40 inches high.
    $ trillion in a stack of $100 is 670 MILES high.
    The national debt is a stack of $100 bills 6200 miles high.
    Add the unfunded obligations for Soc Sec & Medicare and Federal debt is a stack of $100 bills 37,200 miles straight up.

    The unfunded obligations are NPV. Checkmate.

  29. Jonathan commented on Feb 21

    Short Answer: Yes, we are in stagflation, and it will last a long long time.

  30. wunsacon commented on Feb 21

    >> Here is my perspective on all this – I survived the 70s, I survived the 80s, I survived the 90s, I have so far survived this century …

    Pretty much everyone on this board will “survive”. They come to this blog in part to learn and in part to help anticipate the macro environment and invest accordingly. In turn, that might help them do more than “survive”.

  31. Chief Tomahawk commented on Feb 21

    Chief Tomahawk,
    thats not funny, I was long silver with the Hunt Bros. at the time and had my ass handed to me when they bailed. I barely had enough money to open another margin account.

    Posted by: Street Creds | Feb 20, 2008 10:50:23 PM
    ===========================================

    Sorry to hear of that, Street.

    We’ve already had quite a run in precious metals. One has to wonder how much more upside there is in the tank. I sold out of my gold last fall when Guy Adami, of “Fast Money”, thought we were near an elevator trip down. Guy said he’d traded gold for many years, so I bailed, back when the GLD was at $74. I’ve had a good view of the GLD riding higher and higher, day after day since.

    But about that wheat run … they’re pricing it like it’s going extinct. That’s gotta be an indicator of a top.

    One good rally in the dollar bursts a bunch of balloons, I think. But I don’t think it will be, looking back, and honest bounce in the greenback, but rather a short- covering frenzy. When that noise subsides, the commodities fire up again.

  32. DavidB commented on Feb 21

    It looks like there is coming a time for another great education. The public is almost ready. For the last three decades the Keynesians have been able to lie to the public that money supplies can grow to the sky. That lie is currently falling apart and the public will soon be demanding answers.

    Good news…the US Gov’t can’t afford to continue the economic indicator service but the Shadow Gov’t Website can.

    Economic Indicators

    Posted by: Steve Barry | Feb 20, 2008 9:28:06 PM

    Who knows what evil lurks in the heart of governments…..the Shadow knows! HEH! HEH! HEH! HEH! HEH!

    Here are a few central banker axioms that should make their jobs easier. Just so they know that there really is a time to turn off the machines or at least slow them down:

    Print until bankers stop smiling and farmers start

    Or in other words print until the cows come home

    Or how about print until the popular color for bankers is orange

  33. wunsacon commented on Feb 21

    Stuart, as VJ likes to say: “Social Security has never been better funded”. At least, I believe it’s well documented that, by far, the bulk of the costs is from Medicare.

    Francois, couldn’t agree with you more.

  34. John commented on Feb 21

    Lots of good macro opinions. So, with stagflation, where does one allocate his portfolio? With deflation? What is the expected time horizon from here for either scenario?

  35. Pat G. commented on Feb 21

    “Short Answer: Yes, we are in stagflation, and it will last a long long time.”

    I agree. The current “real” inflation rate is as high as it was in the 70s and worse; higher now in other major global economies than it was then. It is all about capital preservation or stores of value. Think precious metals.

  36. DavidB commented on Feb 21

    I remember back in the late 90’s how we’d talk about the days when gold would be going up $50 in a day. That was back when gold was in the $250 to $300 range and the British central bank was selling it to any ‘sucker’ that wanted it.

  37. TerriB commented on Feb 21

    I agree with Stuart in his comment that we are in stagflation already, but I think a continuous decline in asset prices (especially given excess supply and falling demand) will eventually push us into deflation. I also think it’s hilarious that the government is attempting to encourage people to spend. Spending money consumers don’t have was part of the original problem, and if their ‘plan’ actually does work, it will simply be a delay of the inevitable.

  38. Douglas Watts commented on Feb 21

    Infrastructure, baby. Sewage treatment plants and bridges. All of the original Clean Water Act sewage treatment plants need to be rebuilt and completely redesigned. They are 40 years old. Water treatment and sewer treatment is the most basic societal infrastructure. My brother Timothy and I just forced the City of Brockton Mass. to go to state of the art ultraviolet disinfection that will result in major efficiencies over what state regulators would have allowed (ie. 1970s technology). Just a thought.

  39. Cherry commented on Feb 21

    Deflation has started. What you are seeing in stuff like Metal and energy is typical.

    But the monetary base is contracting. Assets are deflating, layoffs are increasing.

    Now we wait for the specs to crash commodities. It may take to summer, but it is coming.

    The crashing of those prices will be the final death knell of the stagflationists.

  40. rickrude commented on Feb 21

    God Bless Stagflation…
    my oil and gold stocks are doing well.

  41. Bill King commented on Feb 21

    The 0.3% increase in Core was the largest increase since 2006. Increasing rents was the culprit.

    Both energy and food inflation increased 0.7% in January. The BLS has sugar prices down 0.1% in January even though sugar soared 18% in January. Gas & electricity unfathomably, with the record cold weather savaging much of the US, declined 0.5%!?!?

    Apparel prices increased 0.4%. This is noteworthy because Chinese exports had kept this number negative for years. The recently publicized ‘end of China-induced deflation’ is now appearing in the data.

    The usual big Wednesday rally was mitigated by St. Louis Fed Prez William Poole’s comment that rate cuts may spur “unacceptable inflation.”

    The Fed’s palpable inflation angst is evinced by the inflation lamentations of various and sundry Fed officials. However, until the Fed acts, the markets will translate the verbiage as innocuous verbal intervention. That’s why gold and oil jumped to new records yesterday.

  42. Michael Donnelly commented on Feb 21

    Still not really worried about general inflation for 2 big reasons.

    Massive Deflation occuring in housing sector, housing is multi trillion dollar asset whose price is falling. Energy, Commodities, and Food together are still smaller.

    Wages are still about 70% of GDP, as long as inflation doesn’t creep into wages, inflation can’t really take off. With globalization, rising unemployment and companies able to sh**-can people at a moments notice, they can’t demand higher wages. Plus private unions are dead.

    = rising prices on all the stuff you buy, no corresponding rise in wages, and housing prices slumping.

    It’s a nasty combo but very different from the 70’s

  43. Finance Monk commented on Feb 21

    Re: Donna:

    Oh, and what’s different is in the 70s we had this thing called SAVINGS.

    Sure, we were pissed that they were worth less and less, but it helped. Now? I’m watching friends not be able to pay their rent and car payments, and not being able to find work.

    To be fair, inflation can help debtors with fixed rates. A $400 a month payment becomes increasingly easier to pay as money becomes cheaper. Of course, that’s assuming they get to keep their jobs… and I can only imagine what happens to ARM and variable-rate loans if expected inflation starts to rise.

  44. Will G commented on Feb 21

    The last two periods of stagflation in the US had vastly different impacts on the stock market. The stagflation of the early 70’s included a 25% decline for the S&P 500, whlie the S&P gained almost 30% in the period of stagflation experienced in the late 70’s.

    FYI- Materials was the top performing sector both times.

  45. TKL commented on Feb 21

    DMR — Yes! I noticed that on a similar chart a few months ago, don’t know what to make of it, and still haven’t heard a single econo-pundit mention it.

    If the chart were a seismograph, it would show a major earthquake. Prices have come untethered from their great-moderation moorings. Yet the trajectory is not yet clearly upward. At a minimum, the instability would seem to call for much higher long-term yields to compensate for the risk of an upside breakout, especially in light of the gold and commodities action. Who the hell would take 3.8% for 10 years with all that staring them in the face?

    BR, I once considered sending you an e-mail suggesting the point DMR now raises as a subject worthy of its own blog entry. What is the meaning of this new era of inflation volatility?

    For what it’s worth, inflation picked up in the late ’60s before exploding in the ’70s, but seems not to have exhibited much volatility. It mainly went higher, and then higher still.

    And the Shadow Statistics angle doesn’t seem to explain it either. The chart for CPI calculated by the pre-Clinton methodology tracks higher than the official numbers, but doesn’t show less volatility.

    Maybe the numbers are getting whipsawed between the effects of a 1000% rise in oil and globalization’s persistent clampdown on wages. If so, volatility could rule unless and until those forces are altered. A couple of scenarios: (1) oil falls in world recession, globalization remains, and inflation falls, either to the point of moderation or to the point of deflation; or (2) despite globalization, wages rise to pay for increasing costs of necessities, while emerging nations continue to force oil upward, and inflation breaks to upside.

  46. TKL commented on Feb 21

    Stagflation is a badly misleading oversimplification of the 1970s. The economy grew quite well during 1970-’73 and especially from 1975-’80. For the decade, GDP grew almost 40%!

    The reason the ’70s get a bad rap is that they encompassed two unhappy recessions (and probably suffer guilt by association with two more in ’80 and ’82). Those were the “stag” parts of the ’70s.

    But even there, the stagflation idea is misleading. Recessions are the cure for inflation. And the recessions of the ’70s were no exception. Inflation had risen before each of them, and inflation came down during, and as a result, of them. It is simply not true that inflation grew at the same time the economy recessed.

  47. Pat G. commented on Feb 21

    An excerpt from an article written by Daniel R. Amerman, CFA…

    “Any government which controls the supply of its own currency can force inflation at any time – it is merely a matter of willpower. For a sufficiently motivated government, inflation breaks deflation. Always and without exception, period, end of debate. The question between inflation and deflation is not one of relative “power” at all, not one of which force will prove more powerful, but of government willpower and motivation.

    1. The potential supply of money is infinite for a nation that issues its own currency.

    2. The supply of resources to purchase with money is always limited at any one point in time.

    3. By sufficiently raising the supply of money relative to the finite amount of desirable goods and services, there will necessarily be more dollars competing to buy each asset, and the dollar denominated price will always rise for the asset.

    4. The meaning of inflation is an increase in the dollar prices of goods and services, which is the same thing as a decrease in the purchasing power of every dollar.

    5. So long as a government is willing to sufficiently increase the supply of money, it has an absolute power to destroy the value of its own currency through the oversupply of money relative to assets, which is an absolute power to break deflation with inflation.”

    ALL DEFLATIONISTS PLEASE READ.

  48. PFT commented on Feb 21

    In the 1970’s, they actually dared to tell us what the real inflation was, so wage growth increased accordingly, we had more unions then, interest rates for saving and money markets were high to cover the real inflation, and encouraged saving, and at the time, most household had only 1 worker, and the woman in the household could help out in a pinch with a part time job. Much of the 70’s and early 80’s inflation was actually due to similar reasons as today, loss of confidence in the dollar internationally after we were forced to go off the gold standard for international settlements. This required high interest rates to maintain the dollars value, and then those huge jumps in oil prices.

    Volcker finally squeezed the inflation out of the economy, and the price we paid was the loss of our manufacturing base, a decaying infrastructure and the supremacy of financial industries.

    The real problem though, then and today, is that the government does not issue it’s own money. The privately owned Fed issues the money. The government borrow what they need to spend in excess of revenue they receive.

    When the Fed buys 1 billion of government Treasuries, they create 1 billion to buy them (they do not need to print them, it’s checkbook money). The Federal Reserve System can then create over 9 billion to loan or invest. How much is determined by the Fed policies, and they say the sky is the limit. M3 is estimated to be growing at 15% per year. Money is being created, but where is it going? The government has no control over this.

    Excess inflation of today, as in the 70’s, is largely due to a weak dollar as a result of our deficits, high oil prices, and something new, cartel pricing practices in Finance/Insurance, Energy, Health, Agribusiness, Energy sectors. This has been somewhat offset by import pricing being controlled, but this is coming to an end. In China, the currency has been allowed to appreciate almost 15% in recent years against the dollar, oil prices are driving up cost of materials and manufacturing costs, wage growth in China is over 20% in some regions, and China has adopted a new labour law that will drive up labour costs if enforced. Core will be king no more.

    On the asset side, you are finding that while our money supply overall is quite high, it is in the hands of a few people, and most of it is invested as fictitous capital, which has been our biggest growth industry, but benefits few in the real economy.

    In the real economy, there is not enough money today, wages are stagnant, unemployment is increasing, savings are being depleted, banks are afraid to loan, interest rates are actually increasing despite the Fed cuts, so you see deflation in real estate and other tangible assets.

    Housing prices actually had just kept up with real inflation, which is not the fraudulent CPI. But real wages decreased. The reason for the sub-primes is that not enough borrowers were eligible for prime loans, and not that banks wanted to make risky loans. Banks live on loans, because the money they lend out is created out of thin air, and over the life of a mortgage, they get much more in interest than the principal they created (thats another reason why we have inflation, which is just another form of a tax, the banks only create the principal, they do not create the interest you pay on the loans). So they did not mind loaning the money to those who would default at rates up to 20%.
    Easy come easy go, so long as 80% pay their loans back, life wil be good. A bad loan is better than no loan, at least 80% of the time, and the 80% will more than cover any losses on the 20% bad loans, especially when housing prices increase.

    But then housing prices dropped, and while our SOT former company is very pleased, those 20% bad sub-primes will end up over 50%, and even primes will get hammered as equity in homes needed to make future mortgage payments get burned off. Party over.

  49. Winston Munn commented on Feb 21

    There is a concensus that inflation is beneficial to borrowers as it allows repayment with devalued currency.

    If inflation is the problem, then how is the following explained?

    From Russ Winter:

    Quote: “Feb. 20 (Bloomberg) – California’s budget deficit widened to $16 billion…. the state’s fiscal analyst said. The deficit is $2 billion larger than what Governor Arnold Schwarzenegger predicted in January…

    Half of U.S. states, including New York and New Jersey, are projecting budget deficits next fiscal year.

    The city of Vallejo is on the brink of becoming the first California city ever to declare bankruptcy, City Council members said Tuesday. Vallejo may run out of cash as early as March.

    On the junk finance front we see an increasing trajectory of defaults building.

    ‘Covenant cushions are weakening,’ Puchalla wrote. A weak cushion indicates a company may have trouble freeing up cash for spending and accessing revolving credit lines, according to the report.

    Creditors are making borrowers increase the interest on their debt by an average 0.83 percentage point to change the terms of their loans, the highest price since at least 1997, according to data compiled by Standard & Poor’s in New York. The penalties are four times higher than six months ago, S&P said.” End Quote.

    Looks to me with everyone needing cash and not so much cash to go around that demand will lead to an increase in its value.

    That is the opposite of inflation.

    My hypothesis of what has occured and what will occur is that the super-inflation risk causing such concern has already transpired, but the affects were diffused throughout the world by world purchase of U.S. debt.

    Having transpired, what we are seeing now is simply the crack-up boom of dollar holders fleeing into commodities – it is a last gasp to protect dollar assets.

    Without a consumer base to continually drive up the expansion of debt, the crack-up boom looses its main engine.

    The end result is collapse.

  50. Kaleberg commented on Feb 21

    As far as 95% of Americans are concerned we’ve been living with stagflation since ’01. Wages have been flat, and the prices of inelastic goods have been rising.

    For most people the GDP is just some obscure scientific statistic, like the mass of the Higgs boson, and has about the same relevance to their financial well being. They live on their wages, not Higgs bosons.

    In the 1990s Alan Greenspan declared that inflation meant wage inflation. Most Americans do not have anyone on their payroll, so they’ve seen a lot of rising prices. Think of non-wage inflation as the dark matter of economics, except that physicists have made a good faith effort to measure it.

    What ended stagflation? If I remember, having bought a house in 1979, it was amazingly high interest rates. Talk about a 19.5% mortgage. We’ll only see that if a Democrat is elected. There’s no way the Fed would do that to a Republican.

    Right now the Fed has opened up the bar at the AA meeting, so I’ll be expecting to see things get worse before they get better.

  51. Gled commented on Mar 4

    Developed countries are forced to pay the highest affordable price (currently 10% of global GDP) for energy produced by a negligible minority (currently ~0.1% of global working population) and sold at prices greatly exceeding the cost price (currently by 40 times). This burden of overpayments keeps the developed economies eternally on the verge of breakdown, making any large-scale expenditures of whatever nature, including environment, intolerable.

Read this next.

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