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Posts Tagged ‘stagflation’

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

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

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.