U.S. Inflation Rate Spiraling Out Of Control: Is Stagflation And A Depression On The Horizon?

April 15th, 2022 Comments off

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

 

Earlier this week the Labor Department released statistics on the CPI (consumer price index) for the period March 2021 through March 2022. The news was dismal,; the CPI data revealed that inflation in the United States had reached 8.5 percent. This is the highest level of CPI growth in the U.S. over a one year period registered since December 1981.

As bad as the official figures are, the reality is probably much worse. Typically, American government statistics reflecting inflation are lagging indicators. What is clear is that inflation in the U.S., as in most of the world, is accelerating at a quickening pace. It probably has reached double digits in the U.S., with every indication that it will continue to increase, probably well into double digit territory.

As to be expected, the Biden administration is blaming the Russia-Ukraine war for spiraling inflation. No doubt, Russia’s invasion of Ukraine has had a major negative impact on price stability. However, contrary to the spin of President Biden and his officials, the primary driver of the worst inflation spiral in the U.S. in more than 40 years has been policy missteps  of both a fiscal and monetary nature.

On the fiscal side the U.S. government responded to the Covid pandemic with levels of deficit spending that, in real terms, exceeded the debt spending required to fight World War II. In addition, government mandated lockdowns and restrictions on economic activity, both in the United States and worldwide, disrupted  supply chains. Added to all this has been the non-stop money printing by the Federal Reserve. In defiance of economic logic, the Fed unleashed an unprecedented floodtide of liquidity, while publicly claiming that the resulting inflationary upsurge was merely “transitory.”

The accumulation of policy missteps by sovereigns and central banks, especially as had occurred in the United States, has created a vicious negative feedback cycle. On the one hand, inflations is at its worst in more than 40 years, and accelerating. On the other hand, labor will demand massive wage increases to match the CPI , which will in turn add further pressure on the inflationary trend. Only recently has the Federal Reserve begun to comprehend its massive policy errors, and is beginning to play catch-up. With interest rates set to rise sharply over the next several months, policymakers have crafted the perfect storm: high inflation and a severe recession, leading to a likely stagflationary depression.

Global Economic Consequences of Putin’s War On Ukraine: Great Depression 2.0

March 5th, 2022 Comments off

The world’s foremost economist when it comes to projecting negative economic phenomenon, Nouriel Roubini, recently posted an article on Project Syndicate with a dire warning:

It is tempting to think that the war in Ukraine will have only a minor economic and financial impact globally, given that Russia represents merely 3% of the world economy. But policymakers and financial analysts need to avoid such wishful thinking.

 

All the negative inflationary trends already baked into the cake for 2022, and long dismissed by the U.S. Federal Reserve, will now be further accelerated and become more broad-based. The sanctions being imposed on Russia will not only damage Putin’s economy but also further augment inflationary pressures in the global economy. Furthermore, Roubini warns, Russia will inflict its own asymmetrical retaliatory measures, adding to the overall pain in major economies.

The cumulative effect of the measures enacted in the wake of Russia’s invasion of Ukraine will be massive stagflationary trends-high inflation combined with low or negative economic growth. But with central banks already having loosened their monetary policies for far too long, their ability to engage in damage control is limited, Roubini  warned. Based on recent policy mistakes, Roubini believes the Federal Reserve will likely “fudge” rate hikes to avoid creating a fiscal drag that heightens recessionary forces. But energy prices will continue to spike. Inadequate measures by central banks will only augment inflationary expectations. Attempts to increase alternative supplies of oil with a nuclear deal with Iran are likely to fail, resulting in energy hoarding.

It is not only central banks that are in a bind, according to Nouriel Roubini. The vast deficit spending unleashed by sovereigns to counter the negative shock from Covid have led to soaring public debt levels, leaving little fiscal ammunition to confront the economic consequences of Putin’s war on Ukraine. Furthermore, Professor Roubini points out that the economic crisis generated by Putin’s attack on Ukraine has led to a negative supply shock, fundamentally different from the demand shock generated by the credit crisis that occurred in 2007-09. He warns that fiscal stimulus is the wrong response to the current crisis, and will only accelerate already high inflationary expectations.

Nouriel Roubini offers the following sobering conclusion:

 

The global impact of Putin’s war will be channeled through oil and natural gas, but it will not stop there. The knock-on effects will strike a massive blow to global confidence at a time when the fragile recovery from the pandemic was already entering a period of deeper uncertainty and rising inflationary pressures. The knock-on effects of the Ukraine crisis – and from the broader geopolitical depression it augurs – will be anything but transitory.

 

My own assessment; we are now in a deep global economic crisis that will be enduring, likely for the remainder of the decade. It will be the Great Depression 2.0.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Global Economy on the Precipice of a 1930s Style Depression: Inflation, War Threats and Covid

January 31st, 2022 Comments off

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

Now that the U.S. Federal Reserve and other central banks have been finally forced by reality to abandon the fiction that inflation was a transitory phenomenon, they have hinted at upcoming interest rate rises  during the course of 2022. However, having been so wrong in policy measures thus far, it is highly likely that the Fed will be equally error-prone in the coming months. In the meantime, other factors are at play, beyond the grasp of any central bank’s efforts.

Instability is a toxic brew for economics, and the first weeks of 2022 already point to a year of geopolitical disarray. The Biden administration has gone public with warnings that Russia is about to invade Ukraine, stampeding its NATO allies into joining the anti-Putin hysteria. Even if the prediction of a Russian invasion should prove false, the loud manner that Washington has dealt with the issue assures greatly heightened tension in Europe, creating new strains on the world’s economic order. This is already reflected in the continuing rise in energy prices, including oil and natural gas, with the latter being a manifestation of European dependency on Russian energy exports. Added to this are the growing signs that the negotiations over Iran’s nuclear program are not going well. Should they  collapse, this will create the growing danger of war in the Persian Gulf region, and the possible closure of the Straits of Hormuz, through which 30 percent of oil exports worldwide traverse. That alone would conceivably double or triple oil prices, virtually overnight.

Ukraine and Iran are not the only flashpoints on the horizon. North Korea continues its belligerent weapons testing. It is not inconceivable that it will conduct another nuclear weapons test during the course of 2022. In the meantime, there are growing strains between China and the U.S. over Taiwan.

While the geopolitical stability of the world continues to erode, the Covid pandemic is entering its third year, with no signs that its debilitating impact on global supply chains and normative economic activity will be ameliorated in the near-term.

In the meantime, opaque crypto-currencies have become major factors in the world financial order, posing dangers similar to that of derivatives during the 2007-09 Global Financial Crisis, but to a much higher degree.

With all the warning signals indicated above, this is the time that the Federal Reserve will have to begin lifting its near zero interest rates and end its lavish quantitative easing. The odds are that these policy measures will prove insufficient in arresting high inflation increasingly being nourished by factors unrelated to sheer monetary policy. What is more likely is that the Fed will stumble and likely precipitate a collapse of the asset bubbles it has created in the equities and real estate markets. All these factors point to not only a severe global recession, but something much worse; depression 1930s style.

U.S. Inflation Rate Rises to 7 %;Federal Reserve Will Be Compelled To Raise Interest Rates

January 12th, 2022 Comments off

The U.S  Labor Department released its CPI data for December 2021. It shows that, compared with the CPI for December 2020, the past year has seen an annual inflation rate of 7 %. Compared with the prior month, the CPI advanced a full half of a percent.

The official inflation  numbers make it clear that the Federal Reserve’s often repeated claim that inflation was “transitory” was a myth. If anything, inflation in the United States is accelerating. Furthermore, many economists view the official CPI data as an undercount. Likely, true inflation in the U.S. has reached double digits.

The reasons for this wave of inflation , unprecedented in the U.S. economy since the 1970s, I have commented on before in previous blog pieces. The important question now is what will the Fed, as well as other leading central banks in major economies, do in response to a clearly sustained wave of major price inflation.

Recently, even the Fed has abandoned its moniker that inflation was a transitory phenomenon . The Federal Reserve is now openly mulling monetary tightening in 2022, with intimations of 4 interest rate increases during the course of the year. However, the Fed and other central banks have been so muddled in their policy responses to date, it is likely that the steps expected will be ineffective. Should inflation further accelerate, compelling a more severe monetary retraction, the whole edifice of major equities and real estate valuation expansion built on cheap money will collapse. This makes a severe recession , and even a depression, a more likely near-term economic outcome.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Is The Global Economy Sleepwalking Into Stagflation?

December 7th, 2021 Comments off

The economist  Mohamed El-Erian poses the provocative question on his twitter feed; are advanced economies sleepwalking into stagflation? He adds that while this is not his baseline projection (at present), the risks are growing. He points out that not only the latest variant of Covid, Omicron, but also rising geopolitical tensions heighten the probability of stagflation.

Stagflation is perhaps the most destructive economic phenomenon. It combines the worst of all intersecting economic trends: high Inflation and low or negative economic growth. All the current economic indicators point towards the increased risk of stagflation, a condition last witnessed by advanced economies in the 1970s  after the oil shock, right through the early 1980s.

At present, the primary economic shocks are largely self-inflicted, and centered around policy responses to Covid.  Repeated bouts of economic shutdowns and restrictions, leading to supply chain  disruptions and labor dislocation, combined with historically unprecedented borrowing by sovereigns abetted by central banks running their debt monetization programs on steroids, have brought to global economy into a perilous place. Now, as though there are not yet sufficient red flags, global tensions are growing: U.S. versus China on Taiwan, U.S. versus Russia on Ukraine, not to mention the Iran nuclear crisis. A perfect storm is brewing, and beckoning for the onset of stagflation.

Meanwhile, the U.S. Federal Reserve may be having seconds thoughts on its stealth policy of high inflation as a means of wiping out the radical and unsustainable rise in public debt. For the first time, the Fed is abandoning its position that high inflation is “transitory.” It may be too late. Economic forces will almost certainly compel the Fed to move much more quickly on monetary tapering. The end result will likely be a severe fiscal drag on the American economy, accelerating the onset of stagflation.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

U.S. Annual Inflation Rate Soars to 6.2% As Federal Reserve Engages In Deliberate Deception

November 10th, 2021 Comments off

 

The U.S. Labor Department has released its most recent official inflation report, which shows that the annual rate has now reached 6.2 %. This is the highest level of inflation in the United States in thirty years. It should be noted that official statistics on American inflation  are usually a lagging indicator. Likely, annual inflation in the U.S. is in the 8-9 percent range.

As noted on this blog previously, there are a number of converging forces feeding this inflationary spiral, which is afflicting not only the U.S. but the entire global economy. These include Covid restrictions that have reduced employment in key sectors, everything from shipping capacity to energy production and computer chip manufacturing. Then there has been the unprecedented flood of liquidity released by many central banks, in particular the Federal Reserve, which in this mix of lower productivity serves as a turbocharger of inflationary forces.

The policy of the Fed, up to the present moment, has been to claim that this inflationary spiral is merely “transitory.” No one believes this anymore; it is absurd to believe that the policymakers in the Federal Reserve believe their own lies.

Why is the Fed engaging in deliberate deception, while inflation is likely to hit double digits? It would appear that the Fed has concluded that the American economy is in such dire straits, it requires the life support of money printing (quantitative easing and monetization of public debt). Furthermore, the level of public debt is reaching the point of unsustainability, leaving  only two outcomes: the U.S Treasury defaults on the national debt or the real value of the debt is sharply diminished by high inflation. Of course , the Fed will never publically admit that it prefers inflation, even at a high level, than the alternative. This would involve sharply raising interest rates, leading to a sharp recession.

The danger of the Federal Reserve’s policy of deception and stealthily preferring high inflation is that it will lead to unforeseen consequences. Sustained economic growth along with political stability is incompatible with high inflation. Ultimately, the Fed policy will lead to stagflation, and eventually the Federal Reserve will be left with no alternative but to sharply raise interest rates, however in a more consequential manner.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

ECONOMIC RED ALERT! Why Coming Economic Crisis Will Be Far Worse Than The Global Financial Crisis Of 2007-09: A Complex Web Of Supply Chain Disruptions, Central Bankers On Steroids, Massive Sovereign Debt and Cryptocurrency Volatility

October 26th, 2021 Comments off

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

There are two parallel economic universes that currently exist. There is that of the central bankers, who still largely maintain that the rapid inflation growth affecting the world’s commodities, finished goods and services is merely “transitory.” The monetary policymakers are joined by their counterparts in the fiscal and political realm, who are engineering massive deficit spending , justified by the need to “fight” Covid, while pretending that there is no economic or financial crisis, merely temporary bumps in the road.

Then there is the real economic arena, with red lights blaring and klaxons blasting away as the probability of a global economic implosion grows ever stronger.

When the 2007-09 Global Financial Crisis first arose, the chairman of the U.S. Federal Reserve, Ben Bernanke, boasted that there would be no recession. How wrong he was.

He and his counterparts within the Fed did not comprehend the complex interconnection between sub-prime mortgage backed securities and the global financial system, exacerbated by a then ill-understood financial instrument, derivatives. Thus when sub-prime mortgages in the U.S. went bust, their collapse took down much of the global financial system.

Now, in 2021, the global financial system has vastly greater complexity, interconnections and vulnerabilities than existed during the last major economic and financial crisis. For one thing, it is not just what happens one major economy. Now there are two.

China is on par with the United States as a critical global economic player. China today is experiencing major financial dangers, especially in the real estate sector. The present crisis afflicting Evergrande, China’s second largest developer of real estate, is a harbinger of the precarious state of debt-financed commercial and residential property activity in that country. Bad economic outcomes in China will be added to those in the United States, creating a financial tsunami affect far in excess of what occurred in 2007-09.

Then there are the economic ramifications of Covid and the reaction of monetary and fiscal policymakers. They shut down at various stages large segments of the global economy, back-filled the contraction that resulted with unprecedented levels of debt spending, which was augmented by central banks opening the spigots on massive liquidity infusions. The predictable result has been levels of inflation not experienced in major advanced economies since the 1970s. This has been further enabled by Covid-imposed disruptions in global supply chains.

Then there is an element that did not exist in 2007-09 as a significant financial factor; cryptocurrencies. They are opaque, in the case of Bitcoin the identity of its actual creator is unknown. They employ an archaic blockchain technology, and are a favorite currency vehicle for criminal enterprise, large and small. And yet, despite all that, cryptocurrencies have become a major force in global finance. Even In better times they displayed high levels of volatility. In the impending economic crisis. a severe collapse in cryptocurrency valuations will greatly add to  negative forces threatening all economies.

As the above makes clear, the current global economic order is characterized by an unprecedented level of complexity. Few economists, and virtually no sovereign fiscal or monetary policymakers, comprehend this complex economic reality that is about to come apart.

Inflation On Steroids

October 15th, 2021 Comments off

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

 

For the past several months my blog has warned about the growing inflation threat to the global economy. That, and other economic distortions of a massive character, have made stagflation-inflation plus low or negative economic growth-an increasingly likely trend. Over that same period, central banks have nourished the flames of inflation, especially in the U.S.,  where theFederal Reserve has preached the erroneous gospel that inflation was only transitory, and therefore not a trend that should be of concern.

Reality has now caught up with the Fed.  At least some of the key players on the Federal Reserve have reluctantly agreed that inflationary pressures are real, and likely to be  a trend and not transitory. And then there is Larry Summers, former U.S. Treasury Secretary. He recently told Bloomberg News that the Federal Reserve’s policy errors are stoking inflation, making 1970s style stagflation inevitable. He told Bloomberg News, “we have a generation of central bankers who are defining themselves by their ‘wokeness.’…they’re defining themselves by how socially concerned they are.”

The causal factors for this surge of inflation are due to reactions by both sovereigns and their central banks to the Covid pandemic. Poorly conceived policy decisions have disrupted supply chains and labor markets. For example, in February of 2020 the percentage of eligible Americans in the active labor pool was 63.3%. By September of 2021 the labor participation rate had declined to 61.6%. With millions of workers absent from the labor pool and production and shipping of commodities and finished goods globally impeded, the resulting shortages have spiked prices of essential products, including food and energy.

As though government policy was not enough, central banks through profligate monetary policies have flooded a constricted global economy with unprecedented levels of liquidity. The result was fully predictable; turbocharged inflation. That is why housing prices in the U.S. have risen by more than 20% in the past year. They are projected to increase another 20% in the coming year, despite a weak economy. Simply put, the Federal Reserve, through artificially low interest rates and an out-of-control printing press, has encouraged speculators to buy up housing stock as investment properties, taking advantage of cheap money.

A stagflationary calamity looms just over the horizon. Unfortunately, policymakers and central bankers, especially in the United States, seem totally out of touch with reality, residing in a parallel universe while the global economy is on the edge of a cliff.

China’s Second Largest Property Developer, Evergrande, On Verge of Collapse

September 26th, 2021 Comments off

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

With 1,300 projects across 280 Chinese cities, Evergrande  currently ranks as the second largest property developer in China and one of the major builders of apartments in the world’s second largest economy. But not for long.

As a result of Chinese government measures that were meant to put a brake on rising housing prices by restricting riskier mortgages, but had the unintended consequence of curtailing  credit to an extent that had not been foreseen, Evergrande is now starving for cash. It has  $300 billion USD in debt, and is increasingly struggling g to meet  interest payments. The likelihood is that Evergrande will default on its outstanding loans.

There are already predictions that Evergrande will become the Lehman Brothers moment for China. Despite the nation being an authoritarian police state, there have been angry demonstrations  throughout China, bordering on riots. The reason is that large numbers of investors, and well as a multitude who have placed large down payments on apartments that may never be built, are angry at the prospect of finding themselves suffering massive and possibly irrecoverable financial losses. It should be recalled that the bulk of Chinese citizens’ wealth is the equity in their apartments.

Though the bulk of those directly exposed to the risk of an Evergrande collapse are Chinese citizens, the repercussions  cannot be contained within China. The size of the Chinese economy and its global interconnectedness mean that there will be collateral damage and contagion impacting the entire global economy. Just as the implosion of the U.S. subprime housing market set off the global financial crisis of 2007-09, the impending demise of Evergrande may very well be the final nail in the coffin of the post-pandemic world economy, ushering in the global economic crisis of the 21st century.

Evergrande may become the epicenter of global financial contagion, just as Wuhan was for the Covid pandemic. What happens to this very large but increasingly insolvent company will be highly consequential for the global economy.

Global Inflation Rising At Double Digits As House Prices In U.S. Skyrocket

September 13th, 2021 Comments off

Sheldon Filger-blogger for GlobalEconomicCrisis.com

 

 

There is increasingly worrying data emerging from the largest developed economies, revealing rapidly rising levels of inflation. Despite the veil of silence being maintained by sovereigns, and the claims by central banks such as the U.S. Federal Reserve that inflationary spikes are but a temporary phenomenon, the data tells a different story.

 

Germany released a report  indicating that in  August, year to year inflation was 12.3 % versus  11.3 % in June. This shows that Germany being in double digit inflation territory is no flash in the pan, but a lasting and accelerating trend. This is also the highest rate of wholesale price inflation in the German economy since 1974

In the United Sates, housing prices year on year have risen by almost 20%. This is a staggering number, made more inexplicable in the wake of a still weak and Covid ravaged economy being propped up by both government deficit spending and Fed monetary loosening. And those policies lie at the heart of the problem.

Covid has afflicted global supply chains, leading to shortages of key commodities and industrial parts such as computer chips for automobile manufacturers. That in itself is a major driver of price inflation. However, central banks engaging in unprecedented money printing has , in effect, turbocharged inflation.  The artificially low mortgage rates  that have resulted from Fed policy decisions have not only provided new home buyers with easy credit; in the United States speculators and investors have been seizing the cheap money now available to buyers of homers  for purposes of flipping them for quick profits or, increasingly , converting them into rental properties.

As I have warned previously,  the indicators of stagflation-high inflation and low or negative economic growth- are increasing, pointing to a dismal long-term economic  future characterized by a severe recession or depression with high inflation in the near or medium term.