The Return of Stagflation?
The Dow up 95 points yesterday. Gold flat.
“Investors start to fret over renewed threat of stagflation,” says a headline in today’s Financial Times.
You remember stagflation from the ’70s. Prices rose. The economy didn’t.
It seems to be happening again – thanks to the feds.
The economy is caught between an unstoppable force on one side and an immovable object on the other. Between a Great Correction…and awful money-printing. Deflation and inflation.
“Don’t fight the Fed,” say the old-timers. The Fed’s easy money is boosting up prices all over the world. Not all prices…at least not in the US and other advanced economies. But prices for key “auction-priced” goods – such as food and energy…and stocks…are going up fast. The typical US stock has gained 100% in the last two years. (We are coming up to the 2-year anniversary of this rally next week.) And yesterday, we paid more than $6 a gallon for diesel fuel in France.
Meanwhile, the private sector is in the grip of a Great Correction. It hit a wall in the crisis of ’07-’09. It wants and needs to sober up, dry out, go through rehab…to discharge its debts, to de-leverage and correct mistakes.
A piece in The International Herald Tribune underlined one of the effects of this process:
“Shaken by the recession, Americans adopt a new frugality…
“Cars, phones, and clothes, once easily discarded, are being kept in use longer…”
The article went on to quote one expert who says people are now “upgrading for necessity, not vanity.”
The public mood is changing…the zeitgeist is evolving with the economy. The lumpenconsumer isn’t the spendthrift he used to be. Because he no longer believes he is getting richer. His house is falling in price. His job, if he has one, no longer gives him the hope of wage gains.
While the feds pump up prices worldwide, the average fellow in America or Europe is unable to keep up. Local products and services are actually falling in price as he eases off his buying habits.
But prices that depend on global markets and energy are going up rapidly.
The result: the irresistible force of Fed money-printing collides with the immovable object of a Great Correction…
…in the smash-up, the debris flies in every direction…giving us a bewildering, mixed up picture that looks a lot like stagflation.
A couple of distortions make the real picture even harder to see.
The feds refract prices through their own bent glass. They filter out the things that are going up – food and energy. Then, they publish a “core” inflation figure and congratulate themselves for a steady, apparently stable price structure.
What is really happening, of course, is that they’re showing only a part of the picture. Taking out the key components, the feds necessarily magnify those that are left – principally housing, which has clearly gone down. The consumer who neither eats nor heats nor travels may enjoy stable prices. The rest of us see our purchasing power eaten away by rising prices for gasoline, cereal, bread, and a lot more.
The other distortion concerns how much consumers have to spend. If you look at income gains in America over the last 10 years, you will find that, on average, people got richer.
But the wealth created during that period did not get distributed widely. Instead, it was concentrated in the hands of “the rich.” To make a long story short, the wealth created in the ‘00s was mostly fraudulent – based on unwise increases in debt. Still, many people managed to pocket huge sums of money – notably, people in the financial sector…or people with financial assets. This leads to the myth that “people” are richer now than they were 10 years ago. They’re not. The typical person did not participate in the money-shuffling of the last decade, except in a modest and unfortunate way. He bought a house for more than it was worth; now he sinks lower in his chair every time he reads the real estate section of the paper. His net worth declines.
Straighten out these distortions and the picture is grim. Low incomes. High debt. Falling house prices. Rising prices for almost everything else.
Stagflation? Yes…it’s just the latest evolution of the Great Correction.
The private sector is still off-loading debt, as near as we can see. But the feds are adding to it. Result? Net, debt goes up worldwide.
So what? Kyle Bass had this little reflection. Read it twice:
We ask ourselves, and urge you to ask yourself one simple question: Does debt matter? It was excess leverage and credit growth that brought the global economy to its knees. Since 2002, global credit has grown at an annualized rate of approximately 11%, while real GDP has grown approximately 4% over the same timeframe – credit growth has outstripped real GDP growth by an astounding 275%. We believe that debt will matter like it has every time since the dawn of financial history. Without a resolution of this global debt burden, systemic risk will fester and grow.
*** The Zombie Wars continue.
There were street clashes in Athens last week. Little wonder. Unemployment among young Greeks is 35%. Why? The geezers have rigged the game against them. They put the price of labor-force participation so high – with regulations, social charges, minimum wages and so forth – that businesses are reluctant to take on young, untrained workers.
Why so many restrictions? They were put in place to protect the old, established, now zombified workforce.
When you are permitted to rig a system for your own benefit it is not surprising that people find clever and corrupt ways to do it. We read yesterday about a hospital in Athens – on the verge of bankruptcy, of course – with 35 gardeners on its staff. What was remarkable about this was that the hospital had no garden.
And now, the Greeks are threatening to bring the whole system crashing down. In Paris, youthful scofflaws frequently jump over the turnstiles in the subway. People look the other way – even people who are supposed to be working for the subway and enforcing its rules. But in Greece, the whole society seems to be jumping over the turnstiles. This report from MSNBC:
The “I won’t pay” movement spreads across Greece… They blockade highway tollbooths to give drivers free passage. They cover subway ticket machines with plastic bags so commuters can’t pay. Even doctors are joining in, preventing patients from paying fees at state hospitals. Some call it civil disobedience. Others a freeloading spirit. Either way, Greece’s “I Won’t Pay” movement has sparked heated debate in a nation reeling from a debt crisis that’s forced the government to take drastic austerity measures – including higher taxes, wage and pension cuts, and price spikes in public services.