New word, "Slumpflation"....by Bill Bonner
"All we can tell you," we told a lawyer at last night's dinner party, "is that things in nature seem to have a certain symmetry. For every right hand, there is a left one. For every mood of ebullience, there is one of despair. For every boom there is a slump. America enjoyed a spectacular boom during the 1990s. The slump that followed was not spectacular. It was hardly noticed."
Which makes us think there is more slump coming.
But what intrigues and titillates us is that what is coming will be spectacular. For the last few years, economic trends lined up in such a delightful way, we could hardly believe it.
Deeply in debt already, Americans were able to borrow and spend even more...while their assets rose in price. They spent money they didn't have on things they didn't need...and then, the nice people in China and Japan gave them back the money so they could spend it again. Mortgage payments went down, while housing prices went up. Meanwhile, the Bush Administration returned some of their tax money...while it too spent more money, also provided by helpful foreigners.
Coming soon, we expect, is a period in which the major trends are so unfavorable, we will hardly be able to believe they could be so bad.
How so? Here we offer not a prediction...but a possibility.
Everyone now seems to expect a continued decline of the dollar. A few Americans are taking precautions. At Everbank, for example, deposits in non-U.S. currencies rose from $135 million a year ago to $525 million now.
But we cannot believe that Mr. Market will go along with what everyone expects. Nor can we believe that the dollar, under the weight of 'twin deficits' of half a trillion each - trade and federal - will go up. But while people expect a decline in the dollar, very few - indeed, none of the economists recently surveyed by the Wall Street Journal - expect a sharp or disruptive drop. The surprise is likely to come - as George Soros suggests - on the downside...with a panic out of the greenback.
As the dollar falls, prices on imported goods - notably oil - would rise steeply. The falling dollar would also cause the collapse of the bond market...even central bankers would be forced to sell U.S. bonds in order to protect their reserves. This would increase the cost of money throughout the U.S. economy....causing asset prices...houses and stocks...to fall. [Ed note: We are putting the finishing touches on our long-awaited report on the dollar crisis...watch this space to learn how you can protect yourself in the event of a dollar rout.]
Americans have enjoyed inflation while it has been confined to their assets. They will not enjoy it when it strikes their living costs, especially when their houses begin to go down in price.
Readers may recognize this set of trends as a bad case of "stagflation." But stagflation describes a world of rising consumer prices without economic growth. Slumpflation will serve as a handle for an economy that is in decline...even while consumer prices rise.
Slumpflation will be neither a gay nor a carefree time. Mortgage payments will rise with interest rates, but house prices will fall. Prices for imports - and practically all 'things' - will rise, while available income - after debt service - will drop.
If it comes to pass, Americans are likely to experience a mood swing. The economy that seemed almost 'too good to be true' of the late '90s and early '00s...will become the economy that is 'too bad to be true.'
Too bad it will be true. |
