Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
Why PEAK INFLATION is a RED HERRING! Prepare for a Decade Long Cost of Living Crisis - 9th Aug 22
FREETRADE Want to LEND My Shares to Short Sellers! - 8th Aug 22
Stock Market Unclosed Gap - 8th Aug 22
The End Game for Silver Shenanigans... - 8th Aug 22er
WARNING Corsair MP600 NVME2 M2 SSD Are Prone to Failure Can Prevent Systems From Booting - 8th Aug 22
Elliott Waves: Your "Rhyme & Reason" to Mainstream Stock Market Opinions - 6th Aug 22
COST OF LIVING CRISIS NIGHTMARE - Expect High INFLATION for whole of this DECADE! - 6th Aug 22
Recession Is Good for Gold, but a Crisis Would Be Even Better - 5th Aug 22
Stock Market Rallying On Slowly Thinning Air - 5th Aug 22
Stock Market Trend Pattren 2022 Forecast Current State - 4th Aug 22
Should We Be Prepared For An Aggressive U.S. Fed In The Future? - 4th Aug 22
Will the S&P 500 Stock Market Index Go the Way of Meme Stocks? - 4th Aug 22
Stock Market Another Upswing Attempt - 4th Aug 22
What is our Real Economic and Financial Prognosis? - 4th Aug 22
The REAL Stocks Bear Market of 2022 - 3rd Aug 22
The ‘Wishful Thinking’ Fed Is Anything But ‘Neutral’ - 3rd Aug 22
Don’t Be Misled by Gold’s Recent Upswing - 3rd Aug 22
Aluminum, Copper, Zinc: The 3 Horsemen of the Upcoming "Econocalypse" - 31st July 22
Gold Stocks’ Rally Autumn 2022 - 31st July 22
US Fed Is Battling Excess Global Capital – Which Is Creating Inflation - 31st July 22
What it's like at a Stocks Bear Market Bottom - 29th July 22
How to lock in a Guaranteed 9.6% return from Uncle Sam With I Bonds - 29th July 22
All You Need to Know About the Increase in Building Insurance Premiums for Flats - 29th July 22
The Challenges on the Horizon for UK Landlords - 29th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Euro-Zone Combats Stagflation with Strong Euro, as Asia Riots on Food Inflation

Economics / Stagflation Apr 17, 2008 - 01:17 PM GMT

By: Christopher_Laird

Economics Best Financial Markets Analysis ArticleInflation and stagflation, Euro, gold, and Asia
Stagflation is behind the strong Euro, but also lots of general commodity inflation. Gold loves the stagflation mixture. If there is one gold bullish factor above all the others, it is if stagflation stays with us. Asia also has its very serious problems with inflation, namely food prices.

After hearing ECB President Trichet spend most of his time talking about inflation in the EU, one clearly gets the idea that, despite the incredible damage the credit crisis is doing to the world economy, inflation remains their main problem. German wage growth is one major concern.

Once inflation works its way into wage growth, wages propel inflation relentlessly upward. Central banks know very well that it is best to stop inflation early in the few percent range, lest prices and wages cycle together and things get out of hand. The EU is facing that dilemma right now.

Rising Euro as ECB combats inflation

Correlated to the inflation problem is relentless pressure for a rising Euro. When the ECB holds off cutting interest rates, and the other central banks, the BoE, Fed, cut, the Euro rises. A strong Euro has reached a pain threshold that causes France and others to scream for a weaker Euro policy. France has had big pressures on their exports because of the strong Euro.

But Germany, the strongest EU economy, won't abide inflationary policy, and the ECB ends focusing on inflation, won't cut interest rates, and is caught in a stagflationary situation. The US is also in that dilemma. If they cut rates, inflation rages. If they don't, the financial markets threaten to implode. They face the dilemma of economic stagnation combined with inflation, stagflation, a combination gold just loves. We could be in the first stages of a persistent several year driver for gold prices based on this stagflationary dilemma. Stagflations persist for years. This happened in the US in the 1970's, and gold reached real highs in relation to other prices then.

If central banks succeed in stopping a big economic downturn, then is the only other option stagflation? If so, gold will go out of sight in a couple of years.

Real gold highs

I have to comment on gold's real prices now. Even though gold broke over $1000 this year, if we were to compare gold prices to other things, gold is still far cheaper right now than it was in say 1980. That is another way of saying inflation adjusted gold is still cheap. 

If gold were to reach the price spike of $870 in 1980 prices, it would have to be at roughly three times that today, or $2610. That is because most everything else is 3 times as expensive today compared to 1980 (Consider oil, housing, autos, etc). Gold at sub $1000 is still really cheap related to everything else. That means if stagflation stays, gold has a long way to catch up, even if only to recapture inflation since 1980. Imagine gold at $2610 in a few years, if this happens.

Well, stagflation is here and it's becoming worldwide. It would seem the ECB is taking a wiser approach to focus on combating inflation, and then letting the economy digest the financial losses building from the credit crisis. If they can hold that line, and the economy does not implode, they will emerge in a few years with a much stronger economy, as inflation would be tamer and people's real incomes are not whittled down by rising prices. In fact, the EU is finding that the strong Euro has helped to insulate the EU from the inflation around the globe today.

Lack of flexibility causes a strong Euro and threatens its viability

But the ECB inflation battle results in a strong Euro, and that is actually threatening the longer term viability of the Euro. If any major EU country bolts, such as France, I guarantee the Euro will drop drastically. Germany and France are very much at odds over this. You may be interested to know that France can leave the Euro if it wants to under the initial Euro treaties. So can the other participants. I think this is an underestimated possibility, the threat of a major country leaving the Euro, when people think of the future of the Euro. Germany is equally unhappy about having to ‘carry' the Euro and the weaker economies.

It is important for Euro fans to ask themselves if a unified currency spanning many different economies, some strong like Germany, and some much weaker like France, is a truly workable idea in the long run. This is particularly so in difficult economic times, such as our present stagflationary environment that seems to be spreading.

I want to pose a question that is radical. Is it possible the Euro will ultimately lose some major participating economies? If so, look out!

Food inflation is Asian Achilles heel

It can be claimed that Asia is seeing inflation on the order of 10%, and China and India have some real problems with this now. The food riots and such, as food prices rise 40 to 100%, put incredible pressure on Asia's Achilles heel, their huge poor population. The fact is that their huge poor sector spends about half their daily income on food alone. IF food prices double, then what is left over?

Don't be surprised. If you make $2 a day, and were formerly spending $1 a day on food, and then food doubles in price, you get to the point of not being able to eat enough. In the richer nations, food accounts for say 7 to 10% of cost of living, but in poor nations food is over 50% of living costs, so these food riots are fairly easy to explain. This applies to Egypt, India, China, the Philippines, and a total of 33 countries right now. Food inflation is not tolerable for these countries.

I saw a story about a woman in India whose husband is a day laborer, and they have two kids. As food prices rose, they first sent the kids away to more prosperous relatives. Then, finally, last week said they could only eat one meal a day… because they literally could not afford enough food. Now that is what I call a critical situation. Don't think China and the other huge poor nations aren't panicking about this.

So, as world inflation rages, food becomes a critical problem. It is said that, unless the world has record grain harvests in 2008, there will be a real world famine in 09…God only knows what that could lead to.

Rising food and oil prices are also increasing stagflationary pressures. Oil/diesel is a key cost of growing food. Rising food prices are key drivers to inflation worldwide. So it appears that stagflationary forces are here to stay across the world.

Our latest newsletter is a special report about financial and personal survival in these trying economic times. 

By Christopher Laird

Copyright © 2008 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

Christopher Laird Archive

© 2005-2019 - 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