The New York Times and the Wall Street Journal [subscription required] are both leading with stories about stagflation -- that combination of slow growth and high inflation last seen during the 1970s. Stagflation has been discussed occasionally in the last several months. I posted about it here and here. That first post, written back in May 2006, is interesting to me because much of it could have been written today.
The stagflated U.S. economy is contributing to the record low, 19% approval rating, for the fellow using Air Force One to visit his fans in Africa. (79% of the public disapproves of his handling of the economy.) His support of subprime mortgages in exchange for contributions from lender Ameriquest along with his $1.3 trillion worth of tax cuts, $9.2 trillion worth of Federal debt, and $2.4 trillion worth of wars have put the U.S. on a precarious financial footing -- hence stagflation concerns.
Here are two reasons stagflation matters to you:
- Bills will grow but income won't. Inflation -- as reported by the government -- was up 4.3%. But anyone who has bought gasoline, heating oil, food, or just about anything else has watched their expenses rise dramatically. Crude oil topped $100 a barrel yesterday and wheat is at a record high. Meanwhile, incomes have stagnated -- declining in relation to inflation in the last seven years. With gold nearing $1,000 an ounce, it's clear that many investors have lost confidence in the Fed's willingness to control inflation.
- Stock market will go nowhere. If you take a look at a chart of stock market performance during the 1970s, you'll notice that stock prices barely budged -- they closed the decade just about where they started. Commodities, however, soared during the decade as those rising prices were reflected in high inflation rates. If stock prices fall enough and earnings growth resumes, the market could do well. Yet the credit crunch shows no signs of abating -- so the crimped economic growth could dampen earnings.
What can you do about this? You could hedge the inflation part by purchasing shares of companies that prosper from rising inflation. Companies that sell oil, wheat, coal, gold, copper, platinum and other commodities whose prices are rising might make good investments. If you put your money in money market funds, you'll keep from losing money if the stock market declines. But you won't keep up with inflation unless the Fed raises short-term rates -- as it did in the early 1980s -- to break inflation's back.
The market liked yesterday's news that the Fed's economic forecast was so bleak. It reasoned that this would mean more interest rate cuts ahead. For now, investors don't seem to care if those cuts fuel further inflation.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
2-21-2008 @ 10:30AM
Americas Watchdog said...
Great Blog Peter;
We have the National Mortgage Complaint Center and we don't think it will be "stagflation". We think its much worse than that. We think US real estate will continue to deflate in 2008 by 10% more (minimum). We also think the Feds lowering rates actually fuels inflation.
For consumers thinking the Fed's lowering rates has helped mortgage borrowers, that would be a pipe dream. The Feds lowering rates has devalued our dollar, it has allowed oil prices to spike, based on a deflated dollar, and we think it points us in a direction no one wants to go.
A National Equity Crisis.
We saw were Wall Street was excited this morning about a rate cut. Why does the Fed want to continue to lower rates? It fuels inflation. It will not fuel a come back of the real estate market or equity that is gone.
When will Wall Street start to look 6 to 10 months out as opposed to 6 to 10 minutes out?
Just as an aside. Yes the CEO of Ameriquest bought a diplomatic position in Europe from Bush & the US Senate. His company gave lots of money to both. His company is gone, it closed its doors, and on average his "mortgage firm" charged millions of consumers 8 points to get a mortgage. (And he did not go to jail).
Pretty sad stuff.
2-21-2008 @ 12:01PM
william grabowski said...
The Fed is the creator of inflation by printing money, mistakes at this level do not happen the fed is not lost but knows exactly the course.......I believe the course is the end of the dollar which would be the catylist for major societal change in our country . We have had over 200 years of freedom, I believe we are about to lose a large share of that freedom in a FINANCIAL DEBACLE BY DESIGN.
2-21-2008 @ 3:36PM
Shane said...
We shouldn't be worried, government economists are way smarter than us right? So what if the power grabs of the last decade has cost upwards of 12 trillion with a "T" dollars. Power is really what make our economy strong right? Besides debt is what keeps this economy going right? Free trade is a beautiful thing right. So what if American jobs are going oversees as long as companies in America are making profits right? So what if budget crisis are forcing cut backs in education which is already far inferior than many countries. American companies will just outsource labor to other countries. So what if inflation is rising we'll just raise the interest rate to balance it right? Foreign interest allows us to maintain huge deficits. This is good for the economy right? A devalued dollar is not so bad it will actually benefit exporters in our country right? So what that as of December 2006, the euro surpassed the dollar in the combined value of cash in circulation this trend won't continue right? We should still continue with the economic principals of the Reagan years shouldn't we?
2-21-2008 @ 11:49PM
Manny said...
Stagflation or whatever term economist will eventually coin for the current condition does'nt matter anymore at this point. The U.S. is in a different phase of economic correction. Jobs that move abroad won't be coming back because US will not become competitive overnight. What is clear is that the current condition will accelerate in creating a solution ...Who wants to cross the country when there's no job.Sounds like it solve illegal immigration right away,right?. The millions of jobless americans will eventually take the ones being done by illegals or legal migrants for same pay.
And guess what? since millions from all corners of the globe still wants to visit and see this once great country,so jobs will still be created but this time it's all service sector. What will fuel this? of course,other currency will appreciate against the dollar thus making a US trip for the first time more affordable to millions of people in this planet.Americans will still own the restaurants but a 100 % doing the serving and 100% americans doing the preparation,cooking and washing the dishes up to the last low end of the process all americans. Is'nt it great,all americans at last,although this time ,a 100% american serving Chinese, Indians and a handful of middle class Mexicans tourist too.
A scenario a decade down the road. We'll never know but it's seems a lot faster than the lousy manuevering of politicians that eventually will solve nothing at this point.
2-22-2008 @ 2:37AM
john said...
Lets remember how we kicked stagflation last time, Ronald Reagan cut marginal tax rates dramatically and the Federal Reserve raised interest rates in a big way. The housing bubble and the current inflation problems were both caused by Sir Allan keeping interest rates too low for too long and his successor seems to be from the same school. Where is the jolly green giant (Paul Volker) when you need him?