THE Stagflation Thread (merged)

[Leanan]

New orders for long-lasting goods posts biggest drop since September 2002: http://money.cnn.com/2005/04/27/news/ec ... /index.htm

Nasty surprise, that perhaps wasn't so surprising. A lot of indicators are pointing to a soft economy. The word "stagflation" is coming up, more and more often: http://www.fcnp.com/507/krugman.htm

[Anjorni]

I just heard about that this morning as well - I remember hearing something like 2% drop in orders for durable goods...

I have a feeling we'll be hearing that word (and this situation) more and more - people actually using their 'durable goods' for more of their usable life. - wow, what a concept - *Repair a durable good* - now that's something not heard of... :rolleyes:

You know though, I find it funny that people expect there to always be a growing number of durable goods... They're durable for a reason, right? So shouldnt these numbers 'normally' be about flat?

I suppose stagflation is something that peak oil will bring about naturally though, right? As the price of energy goes up (which is the basis of EVERYTHING) no real growth is taking place - simply more expensive base. Eventually the price of goods will be so high, people really start conserving, and cutting their spending on other non-essential items (which they're already doing)...

Doesnt take a rocket scientist to see where this is heading...

[Leanan]

You know though, I find it funny that people expect there to always be a growing number of durable goods... They're durable for a reason, right? So shouldnt these numbers 'normally' be about flat?

And that is why capitalism is a Ponzi scheme. It requires constant growth. Why do durable goods always have to increase? Why do same-store sales always have to rise? Why do corporations have to show growth each quarter, year after year?

Because capitalism doesn't just produce growth; it requires it.

[RiverRat]

Temporarily ... it doesn't seem to matter.

Stock market is up today ... oil prices are down today.

The Prez planted a big wet one on a SA official, gave some lip service to his energy policy, and everything seems right with the world.

whew ... that was a close one

[Stoic]

Temporarily ... it doesn't seem to matter.

Stock market is up today ... oil prices are down today.

The Prez planted a big wet one on a SA official, gave some lip service to his energy policy, and everything seems right with the world.

whew ... that was a close one

I wouldn't really call the stock market "up." True, it gained today, but if you like at its 52-week range, today's closing price is nothing to brag about. 10,198.80 is still well below the tech-bubble peak in early 2000, which the DJIA has not been able to regain in the past five years.

[BitterSweetCrude]

New orders for long-lasting goods posts biggest drop since September 2002:

http://money.cnn.com/2005/04/27/news/ec ... /index.htm

Nasty surprise, that perhaps wasn't so surprising. A lot of indicators are pointing to a soft economy.

The word "stagflation" is coming up, more and more often:

http://www.fcnp.com/507/krugman.htm

Duh, Americans don't want long lasting goods, thats why orders are down. If we can't send it to a landfill, we don't want it.

[RiverRat]

Temporarily ... it doesn't seem to matter.

Stock market is up today ... oil prices are down today.

The Prez planted a big wet one on a SA official, gave some lip service to his energy policy, and everything seems right with the world.

whew ... that was a close one

I wouldn't really call the stock market "up." True, it gained today, but if you like at its 52-week range, today's closing price is nothing to brag about. 10,198.80 is still well below the tech-bubble peak in early 2000, which the DJIA has not been able to regain in the past five years.

True …
Taking high oil prices out of the mix, the dismal ‘durable goods’ report would have traditionally put a damper on the stock market.

My point is that the substantial decline in durable goods orders was overshadowed by seemingly good news on the energy front. The market seems to be more in tune right now with oil more than other factors.

I posted this link in another post…

article here

[Ferretlover]

Do you think that PO will bring about a state of Stagflation (??), Where the economy isn't growing but prices are - not a good situation for a country to be in I'm sure ! This occurred to a great extent in the 1970s, when skyrocketing oil prices further slowed economic growth. The effects of inflation were made considerably worse by stagflation.

I can see that Global asset inflation is at play now which is causing huge residential property + commodity price increases. China + India, for example, are acting like a hugh magnet for commodities such as oil, scrap metals, steel products, and cement. This in turn is pushing up Ocean Freight rates both for dry cargo + oil Tankers (also increasing demand for marine fuel).

In the UK residential property has gone up 300% in the last 3 years alone + consumers have built up debts of over GB£ 1 Trillion !! Don't know figures for USA ?? In effect, money, currencies, etc., have been devalued over the last 3 years as they now purchase less - i.e. assets have appreciated by 300% - whereas your money in the Bank would only have grown by say 12% during this period !!

So, the developing economies are now acting as the 'offshore' manufacturing areas for the richer 'Western' Nations. In effect, the 'West' has evolved from agriculture through a 'Production' based economy and is now a 'Consumption' based model.

Of course, in order to sustain Global Expansion, this model needs growth + ENERGY !! i.e. No ENERGY = NO GROWTH !! If we are in a PO zone then I fear that this debt bubble is going to burst + when it does it will make 1929, and the years that followed, look like a walk in the park !

[vegasmade]

onasis you are very right. regardless of oil availability in the future, it's the economic effects that may be the most troubling. in our current state of global capitalism, cheap energy is the driving force in growth. as energy prices rise, growth slows. unfortunately, growth is necessary. here in the u.s., a minimum of 2% growth must be maintained just to service the national debt. that's the same debt our leaders claim will be cut by '09, while they are spending at an alarming rate.
every day a huge amount of money flows into this country from foriegn sources, in the way of investment. if that money doesn't come, our own bankers freak out. any significant hiccup in monetary flow could trigger a quick and lethal crash. our dollar is slowly declining, the stock market is dipping, and energy prices are rising-not a good combonation.
The great depression, and more importantly how we worked our way out of it, isn't a good indicator. At that time america didn't even import oil. it was literally dirt cheap. nowadays, that level of recovery is all but impossible. not to say it can't be done, but it would require the kind of resolve we just don't have.
last i checked, the american people were still mostly ignorant to the idea. our politicians can call special sessions to save one life, but aren't addressing all the lives that will be affected by peak oil. and any hope of riding this out intact is dependent on knowledge and action. even if that means just figuring out where we stand on the curve (i.e. what's been used, accurate reserve data,...), it would be a good start. but instead of coming clean, our governments are posturing like it is very real and very threatening.
ultimately i can't see this working out at all. unless of course there remains time to ween ourselves off oil. with 20 years and significant financial resources, a smooth transition is possible. it will mean a diminished lifestyle and other hardships, but it is the least painfull option. then again, VP Dick has said that the american way of life will not be sacrificed. if not us, who? the kind of mitigation needed can only be handled at the national/international level, yet those kinds of plans aren't being formulated. and they won't. global cooperation in a time of globalist division impossible.
information and time are our only hope, and both seem to be in short supply.

[Ferretlover]

link The Fed is caught in the middle of conflicting economic data. In a statement accompanying their decision to increase interest rates, they say;

Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.

and

Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

(Their emphasis not mine.)
and

...the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Quite a lot could be read into their short statement;
1. The Fed is currently hawkish wrt inflation, ie. it wont hold back from increasing rates even though spending is slowing. The data may be conflicting, but the Fed's response is to raise rates. This shows that their primary objective is to keep control of inflation even if it further exasperates a downturn in growth.
2. This is not real stagflation - it's very mild stagflation. Stagflationesque, but not full-on stagflation.
3. Their emphasis on "Longer-term inflation expectations remain well contained" is odd. Suggestions anyone?
4. The Fed obviously believes that the data influencing their decision to hike rates is not an anomaly. They must believe that the data is real and has to be acted upon.

[nero]

3. Their emphasis on "Longer-term inflation expectations remain well contained" is odd. Suggestions anyone?

I think what they are hinting at is the inability of workers to demand compensatory increases in their wages. Workers are in a very poor position to negotiate higher wages. First there is China and foreign competition, second there are illegal immigrants and third the workers are not organized and their issues are hardly making an impression on the political agenda.

So instead of higher commodity prices feeding through into persistent inflationary expectations like in the 1970s all that will happen is the cost of everything will go up and the middleclass will get poorer.

[MicroHydro]

So instead of higher commodity prices feeding through into persistent inflationary expectations like in the 1970s all that will happen is the cost of everything will go up and the middleclass will get poorer.

Bingo! That is exactly the plan.

Great new book, just out: Greenspan's Fraud by Ravi Batra

[threadbear]

Micro, I LOVE Ravi Batra. He uses the term "inflationary depression" which is perfect.

[DantesPeak]

Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

(Their emphasis not mine.)

What are "Words" for?

The Fed made a unusual revision to its FOMC statement just before the market close. Being that they intentionally created buying panic in the market before with rate cuts, it does not stretch credibility to think this revised statement was an intentional ploy. But what do the words "Longer-term inflation expectations remain well contained" mean?
Actually, not very much.

The Fed previously informed us that it samples market expectations by reviewing bond markets rates, especially on inflation adjusted securities, to gauge 'longer-term inflation expectations'. Bond market participants don't expect much more long term inflation than there exists now. But who is the biggest participant in the bond markets? Foreigners in general and more specifically - foreign central banks. For the most part, they are insensitive to current market price.

So if stock market investors react to a statement that means almost nothing, then the Fed is right that a "words" policy is sometimes more important than what really is happening. Words policy is the belief by the Fed that providing words to direct the markets is important part of keeping those markets stable. Stability of the markets has ascended in importance in recent years to a prime Fed objective.

The words policy may work for a short while. However, over reliance on the words policy is dangerous - because the next time the words are changed or if the Fed makes any policy moves that will reflect the coming deterioration in the economy, panic may set in much faster than we have ever seen before.

[mods: no copyright - I am the author above]

[spot5050]

3. Their emphasis on "Longer-term inflation expectations remain well contained" is odd. Suggestions anyone?

Sadly I've just realised the answer to my own question.

Q. Why did the Fed emphasise that part of their press release?

A. Because they produced one press release but through editing problems they missed a bit out. I was quoting from the second press release so the bold part is the bit they missed out.

[Ferretlover]

I was reading one of the articles posted in the news section today, when I came across this statement:

Pessimistic forecasts of a repeat of the “stagflation” of the 1970s appear unlikely. Global currency and bond traders are quick to punish any government that tries to inflate its way out of a squeeze with easy money policies. Globalization and technology will make the difference this go-round.

What is the rationale behind that argument? MrBill?

[mark]

That single excerpt alone invalidates, for me, everything else he says. According to the website he appears to be an establishment economist; though even widely quoted economist rarely venture into the money creation quagmire. Even a cursory look at the numbers show central banks around the world inflating their currencies at 9 to 10 percent a year. The bond market weenies cry nary a peep. With real inflation in the US at 9% (according to this mornings Mogambo), they happily buy bonds paying 5.25%! Some vigilantes.

The more interesting question for me is that these people keep saying obviously ludicrous things and the press just laps it up. Only Ron Paul is telling the truth; the rest of ‘em mere hacks.

Methinks it will get even loonier.

PS yes mr bill, what say ye?

[NeoPeasant]

I think the economic troubles of the 70's are coming back with a vengeance. I'd call what's coming "Stagflation on Steroids"

[Aimrehtopyh]

Not a very good label, Neo, because steroids promote growth. I'd prefer to call it stagflation with leprosy and diarrhea.

[MrBill]

I was reading one of the articles posted in the news section today, when I came across this statement:

Pessimistic forecasts of a repeat of the “stagflation” of the 1970s appear unlikely. Global currency and bond traders are quick to punish any government that tries to inflate its way out of a squeeze with easy money policies. Globalization and technology will make the difference this go-round.

What is the rationale behind that argument? MrBill?

Sorry, I very quickly skimmed through it. Problems here in the office today and yesterday I wasted a day in Nicosia listening to the Minister of Finance, Governor of the Central Bank of Cyprus, a Director General from the European Commission, a Director from the European Central Bank and the President of the Republic of Cyprus talk about the launch of the euro in Cyprus perhaps as early as 2009.

What a waste of time! Two hours of nothing but banalities without saying a word. Slovenia will adopt the euro in 2007. Lithuania not. Why, because although Lithuania's public finances look better than France's, Germany's, Italy's, Greece's, Spain's, Portugal's, etc. their inflation was 1/10th of a point too high compared to the three lowest levels in the EU. Why might that be? Because their healthy public balances, plus strong growth is pushing up prices, which maybe, just maybe might also be caused by too much global liquidity caused by prolific governments and central banks in much of the western world?!

What they did not dare to address during this two hours of boredom is what situation would cause the ECB or eurozone governments to a) ask Italy to stop issuing debt in euros, or b) ask Italy to leave the eurozone, in order to preserve the integrity of the euro? Nope, accession member countries are bound by the Copenhagen criteria, which I quote: "The conditions to be fulfilled before entering the EU are (ii) to have a functioning market economy as well as the capacity to cope with competitive pressure, in order to be able to take on the obligations of membership, including the aims of political, economic and monetary union." The Eurosystem - Website of the ECB

In otherwords, they have no opt-out clause. They are committed to joining the eurozone system whether they like it or not. But at the sametime, there is no mechanism to expell existing members if they do not adhere to the Maastricht Criteria on debts & deficits. What a farce!

Maybe it's me? Maybe I have been taking in too much Mogambo Guru lately and now I starting to babble in strange tongues, but now I bring it around to stagflation and back on topic.

First of all, anyone who cannot tell you what the price of crude will be in 6-months time is hardly in a position to accurately predict what inflation and growth rates will be either. Common analysis is to take the existing trend, project it into the immediate future, and then allow for some regression to the mean in 12-18 months time. I call it the 'J curve' only because Nike would sue me if I called it the 'swoosh curve'.

What could cause stagflation this time around? Strong world growth in Asia, and elsewhere (CIS, EU & OPEC, plus other energy exporters) that causes a jump in demand for commodity and energy prices, which drives up input prices, increasing inflationary demands in the US economy, at the sametime as a loss of buying power through a weaker US dollar, higher interest rates, high energy prices and too much personal debt reduce consumers buying power, lowering growth in the USA, but not necessarily the world. Declining housing prices would just exacerbate this problem.

This is not a crash scenario. As obviously a crash would reduce worldwide growth. This is to say, the US has drank from the punchbowl for too long and now needs time to sleep off its hangover.

Globalization and technology have certainly made a difference this time around, which is why we have seen easy money flow into assets like housing, corporate bonds, emerging markets and commodities, without causing the classic wage and price inflation which traditionally gets measured. This prompted central bankers to worry less about the effects of this liquidity on asset prices. But I think in the end they are wrong.

We all eat from the same rice bowl, and extra liquidity for one more factory in Chindia to produce cheaper goods, which is deflationary, is one more factory in Chindia that is sucking in commodities and energy, as well as fuelling a construction and property boom in offices, houses, golf courses and even manmade islands in the middle of the desert by rich energy exporters. Globalization is then also helping to send that inflation, not tied to productivity gains, back to the States via capital markets as those lower interest rates than neutral were also stimulative in addition to the added money supply.

But that does not mean the same levels of real inflation and real interest rates as in the 1970/80's. At least not yet, if the FED, ECB, BOE, BOJ, PBOC, BOC, RBA, etc. really do follow through and keep hiking rates, while at the same time as reducing money supply growth. That is, if?

If we return to a normal growth path of 3%, and 3% real interest rates (historically would be about normal), then we have Fed funds and bond yields around 6%, plus some carry, so that the yield curve is not flat or inverted, and that might translate into 8-10% interest rates for consumer loans and mortgages? That is not a meltdown, although it will be painful enough for many, average income earners who are in debt. Tough for them as the Mogambo Guru would say. HAHAHAHA!