Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Death of the U.S. Dollar? Gold an Inflation Hedge? Really? - 29th July 14
We’re Ready to Profit in the Coming Gold Price Correction—Are You? - 29th July 14
Their Economy Will Collapse, Including Ours - 29th July 14
Silver Prices – Megaphone Patterns - 29th July 14
Real U.S. Interest Rates - Fed Exit a Blue Pill? - 29th July 14
Why Israel Should NOT Exist, Just Like Any Other Rogue State - 29th July 14
Gold Still Looking Good - 29th July 14
Silver Price Set To Star - 29th July 14
Our Population Growth Totalitarian Future - 29th July 14
World War 1 Cause and Consequences - The Planned Destruction of Christendom - 29th July 14
Will Crashing Commodities Crash the Stock Market? - 29th July 14
Ukraine MH17 - Washington Thinks Americans Are Fools - 29th July 14
Stock Market Bubble Warning - 29th July 14
Gold Price and U.S. Dollar’s July Rally - 28th July 14
Second Quarter Corporate Earnings: Marching Toward a Strong Economic Recovery - 28th July 14
Time to Put a New Economic Tool in the Box - 28th July 14
Mossad in Gaza, Ukraine and the Cult Of The All-Powerful Elite - 28th July 14
Elliott Wave Gold Price Projection Since 1970 - 28th July 14
Investors Remain Uncertain As Stock Fluctuate Near Long-Term Highs - Will The Uptrend Extend? - 28th July 14
The Mass Psychology Of Decline - 28th July 14
Will the US Destroy the World? - Don’t Expect to Live Much Longer - 28th July 14
GDM and GDXJ Gold Stocks In-depth Look - 28th July 14
Stock Market One FINAL High? - 28th July 14
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

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

© 2005-2014 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

Free Report - Financial Markets 2014