Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Stagflation Revisited - Economic Contraction and High Inflation

Economics / Inflation Sep 28, 2007 - 12:00 PM GMT

By: Peter_Schiff

Economics Best Financial Markets Analysis ArticleCurrently, Wall Street is divided into two camps: those who feel the Fed should fight recession, and those who feel it should fight inflation. The former feel that a recession can only be avoided if the Fed rescues the economy from the imploding housing market.  To these analysts, inflation is not a problem as it will be contained by slower growth. The other camp maintains that the housing slowdown is not significant enough to derail the otherwise healthy U.S. economy, and should therefore not distract the Fed from its primary mission of fighting inflation.  As usual on Wall Street, both camps have it wrong.


Both camps incorrectly assume that inflation (rising prices) and recession are somehow mutually exclusive. By concentrating solely on the demand side of the price equation, Wall Street ignores the impact of supply. In reality, strong growth increases the supply of goods and helps keep a lid on consumer prices. Weak growth reduces the supply of goods and has the opposite effect.

Similar to the 1970s we are experiencing what economists call "stagflation," a period when economic contraction occurs simultaneously with high inflation. Now that Bernanke has pulled the rug out from under the dollar, our currency has become a monetary black hole into which foreign lenders will be increasingly reluctant to trust their savings.  The threat of substantial exchange rate losses will compel foreigners to demand greater compensation for loans to Americans. Thus what the Fed giveth in lower short-term rates, foreign creditors will take away in higher long-term rates. Higher long-term interest rates, tighter lending standards, and a reduction in the availability of credit will suppress asset values and consumer spending pushing the economy deeper into recession.

However, as the dollar falls, far fewer foreign products will be imported into the United States , and more domestic products will be exported from the United States . A reduction in the domestic supply of goods will offset the diminished demand brought about by the recession, causing consumer prices to rise. So while Americans will indeed buy fewer products, they will pay much higher prices for those that they do. The bottom line is that consumer prices will be headed much higher, not just despite the recession, but as a direct result of it!

Many economists acknowledge that a falling dollar will put upward pressure on import prices, but few consider its effects on domestically produced goods. For one thing, a weak dollar by definition raises the prices of globally traded, dollar-denominated commodities, such as oil, causing raw material costs for domestic manufacturers to rise. Also, as a weaker dollar causes foreigners to demand higher interest rates on the money they lend us, domestic capital cost will rise as well.

Further, a global market allows domestic producers to sell their products to the highest bidders, wherever they may reside. For example if a lobster fisherman in Maine can get a better price for his catch in Europe , he will sell to Europeans. A weaker dollar simultaneously makes domestically caught lobster more affordable in Europe as it makes them more expensive here. As domestic demand falls, foreign demand picks up. The result is that fewer Americans will eat lobsters, and those who do will be forced to pay more for the privilege.

In addition, many of the products that we export will not be manufactured, adding little to our GDP and creating few jobs in the process. These products will include used consumer goods, such as cars, appliances, consumer electronics, furniture, etc. Poorer Americans will be forced to sell such possessions so they can afford to buy other goods they will need more, such as food and heating oil. Of course, armed with more valuable currencies, foreigners will have lots of extra purchasing power with which to buy those used consumer goods Americans can no longer afford to keep, as items such as food and heating oil will be a lot cheaper for them. In other words, they will be repossessing all the stuff they sold us on credit.

Unfortunately, the choice that we all are currently facing is much more difficult than deciding to fight recession or inflation. Focusing on one foe at a time is a luxury we have long ago squandered. In reality, we are facing an assault from all sides. Our best course would be to hunker down, settle in for a nasty recession, defend our currency, and try to save enough so that when the dust settles we can try to build anew.

For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2019 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

6 Critical Money Making Rules