Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
David Cameron Questioned on Out of Control Immigration at TEN TIMES Conservative Election Pledges - 30th May 16
Bitcoin Price Skyrockets And Is Now Up More Than 100% This Jubilee Year - 30th May 16
This Is Not The America My Parents Immigrated To In 1957 - 30th May 16
“Debt, Not The Economy, Reaches Escape Velocity” With Graham Mehl - 29th May 16
EU Referendum, Black Vote LEAVE or REMAIN? Which is Worse for Racism for Britain's Ethnic Minorities? - 29th May 16
Billionaire Gross: Jubilee Debt Relief as Prelude to New Global Economic Order - 29th May 16
Wargaming North Korea - Assessing the Threat - 29th May 16
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Is the U.S. Economy Heading for Stagflation?

Economics / Stagflation Jun 08, 2009 - 04:14 AM GMT

By: Gerard_Jackson

Economics

Best Financial Markets Analysis ArticleIrrespective of how Obama's media supporters try to spin it the unemployment situation is grave and still deteriorating. This was not supposed to happen. According to his economic advisors the situation would be disastrous unless congress rushed through Obama's stimulus package. Dr. Christine Romer -- one of Obama's chief economic advisors -- predicted unemployment would hit 8.8 per cent unless swift action was undertaken.


Well it was, yet the official unemployment rate now stands at 9.4 per cent and it could exceed 10 per cent. (It would be 16.4 per cent if those workers who have either given up seeking work or have taken a part-time job as a substitute for full-time work were included in the unemployment figures). And its not getting any better. During April and May manufacturing alone shed 310,000 jobs. The chart below was produced by the blogger Innocent Bystander and reveals just how way out Obama's economic advisors' predictions are.

So much for his vaunted claim to have saved 150,000 jobs. None of this should really surprise us. The economic models that Obama's advisors use are worthless. The people who failed to predict the crisis are the same ones who claimed to be able to accurately predict the rate of unemployment at any point between now and the first quarter of 2014. Like all Keynesians Romer has no genuine idea as to how the economy works. And all the time Romer spends pondering her model unemployment rises along with spending and an unsustainable deficit.

Some commentators see a light at the end of the tunnel. They refer to the fact that though the Institute for Supply Management's PMI shows that manufacturing is still contracting it has nevertheless risen by 2.7 over the April figure. I still have my doubts. The Obama administration is the most financially irresponsible one in US history. His outrageous spending and borrowing will lead to ever rising taxes (John Taylor estimates that balancing the budget, even in 10 years time, would require a permanent 60 per cent tax increase) the ramifications of which must inevitable bear down on economic recovery.

There are two forces at work here: the monetary one and the spending one. Since last September there has been a massive and unprecedented monetary expansion during which the monetary base doubled. That Bernanke has created an inflationary time bomb has not eluded the markets. Yields on 10-year U.S. Treasury bonds have been rising and the 30-year fixed mortgage rate exceeded its three-month peak when it hit 5.64 on 7 June. It seems pretty clear that the markets are factoring in an inflation premium.

So industry will find itself facing rising interest rates in the middle of recession due to the Fed's desperate monetary policy. That's the anvil so to speak. The hammer will be the need to compete against the government for funding, adding even more pressure to rates. To top it off massive taxes are waiting in the wings, including an Obama strike against capital gains. Industry will indeed have much to thank Bernanke and Obama for.

All of this helps explain why the economy is not responding as expected in response to the Fed's monetary policy. And monetary policy is what needs to looked at. In any case, the idea that government spending from borrowings stimulates economic recovery is nonsense, as the Great Depression proves. There is also another factor that most commentators ignore.

A number of readers have pointed out to me that the "productivity of debt" seems to be falling, meaning that it requires more and more debt to get a given amount of GDP. This phenomenon is no mystery to the Austrians. Time and time again they pointed out that so-called pump-priming would require ever more injections of money to stimulate economic recovery in order to overcome the accumulated malinvestments that were not liquidated in previous recessions. What we need to consider is whether the point has now been reached where the size of the monetary injection needed to stimulate recovery is now so large that it results in stagflation.

It used to be that recessions were accompanied by falling prices. Because of this few people realised that though prices in general fell consumer prices rose relative to producer prices. In other words, capital goods suffered the greatest price declines. Now that central banks inflate to prevent price declines we can find ourselves in a situation where consumer prices are rising faster than producer prices even as a large pool of unemployed emerges. This is stagflation.

The logic of this line of thought leads to the conclusion that a stagflationary trend would be reflected in a weak demand for labour. As the money supply increases unemployment still rises followed eventually by accelerating inflation. What this means is that a point is reached where the level of unemployment rises for each consecutive recession and where bringing it down requires greater amounts of monetary injections. The following table is from the Bureau of Labor Statistics.

The left hand side of the chart is the percentage of unemployed and the bottom is the period 1990 to 2009. Note that in 1992 unemployment peaked at 7.8 per cent. The next recession saw unemployment peak at 6.3 in 2003. (I believe that by cutting the capital gains tax by 33 per cent and the tax rate on corporate dividends by more than 50 per cent President Bush reversed the rise in unemployment). The current recession has the official unemployment rate at 9.4 per cent and rising. This is very worrying

Inflation works its black magic by widening firms' price margins thereby causing them to expand output. Considering the present monetary situation and Obama and the congressional Democrats' destructive tax, energy, regulatory, borrowing and spending policies I cannot see where a widening of price margins -- if they do occur -- can bring about a sustained recovery.

People do not seem to realise that the other term for economic growth is capital accumulation. There is absolutely nothing in Obama's economic program that will cause the capital structure to expand. On the contrary, everything points to a contraction. This means that real wages and living standards would have to fall.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2009 Gerard Jackson

Gerard Jackson Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife