jessescrossroadscafe.blogspot.com
The recognition of a US slide into stagflation is beginning to appear in the mainstream media, in this case The New York Times. A slackening in aggregate demand was offset by higher prices paid for necessities such as food and energy, which are running at the shocking annual rate of 13%. This is no surpise to use, as it is in-line with the growth of broader monetary aggregates such as MZM.
It has been the custom of Americans since WWII increasingly to place their savings in their homes, or the housing portion of their balance sheet. The decline of total credit outstanding as debt defaults increase will be charged against the value of that housing asset, which is equivalent to the US consumers savings account. Money is the transmission mechanism between balance sheets and income statements. Therefore we see no fundamental reason for the aggregate money supply to contract, except for brief periods of liquidity constriction which will be more than offset by the Fed. generating monetary inflation as it attempts to restore the bank's balance sheets.
The US middle class will receive the worst of all worlds: higher prices for necessities while their savings evaporate, in a large part to rescue the banks and underpin the financial system, ironically securing the advantages gained by the top 1% of US families over the past 27 years, from Reagan to Bush.
We expect this trend to intensify, and will not abate until US wage growth starts to outpace inflation, now that the housing bubble has reached unsustainable levels and is deflating. This will require a much cheaper dollar than we have today, perhaps on the order of thirty-five percent or more.
But these gains cannot be solely against the euro, but with the Asian countries, especially those running large trade imbalances with the US. Since this conflicts with a long established mercantilist industrial policy we can look for considerable turmoil in the world's government-managed markets. Trade wars will be interspersed by localized conflicts in resource important areas.
Politically it will be a replay of the politics of the New Deal in which a Democratic majority attempts to reform and provide relief, while a Republican minority in Congress and a Republican backed Supreme Court use every method to overturn these reforms and programs.
Unless the Fed mismanages the situation badly, or there is a sudden shift in world reserves away from the dollar, we believe that hyper-inflation is as unlikely as a true monetary deflation in the US. Stagflation of varying intensity for a period of fifteen years of adjustment seems more probable, unless it is interrupted by an exogenous global conflict or domestic revolutionary event. |
