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It's coming – Stagflation

11 Nov 2021 6 month(s) ago

The worst case scenario is looking more likely.

Those claiming that US inflation was just a transitory thing are looking about as convincing as a three dollar bill at this point. Inflation in the US has risen to 30 year highs, and is probably headed higher.

The ABC says:

“Over the year to October, the US Consumer Price Index rose by 6.2 per cent, the biggest jump since 1990. Core inflation, a measure closely watched by the US central bank, the Federal Reserve, gained 0.6 per cent over the quarter and 4.6 per cent over the year.

"The global energy crisis has seen Brent crude oil rise by nearly two thirds this year, although it slumped overnight. 

"Westpac economist Imre Speizer said the rise in inflation was stronger than expected. 'The gains were led by an expected surge in energy prices, but there were additional large gains for new and used cars, tobacco, medical care, and food,' he said.”

Real average earnings (after taking into account inflation) in America have fallen off a cliff. This does not bode well for economic growth:

If economic growth slows sharply, this is starting to look very like stagflation, which hammers investment returns. When stagflation hit in the 1970s the then head of the US Treasury, Paul Volcker, raised interest rates to over 20%, smashing the markets but also killing inflation.

The financial system in 2021 is very different now, though. Economies used to be relatively closed, only trading on the margin. Now, they are extremely open, with $US6 trillion going across borders every day.

It is that openness that has probably quelled inflationary effects: increased money supply does not just stay in the domestic economy with major currencies, it is sucked up by the global markets. Also, most of the money printing went into inflating assets rather than pushing up consumer prices.

But eventually those escape clauses had to weaken, and that time seems to have come. Inflation is rapidly spreading according to The Guardian:

“Major economies across the world are also suffering price rises caused by inflationary pressures. On Wednesday Beijing said inflation in China rose at a 1.5% annual rate last month, a doubling from the 0.7% annual rate in September, while German inflation came in at 4.5% in October versus 4.1% in September.

“The Bank of England, which last week predicted that UK inflation could rise above 5% next spring, has so far adopted the same approach as the Fed, leaving borrowing costs at the emergency level they reached in the early stages of the Covid-19 pandemic.”

The problem is that the usual remedy is for the central banks to raise interest rates. Bond rates are already rising. There is no way that rates are heading back to about 20% (they hit about 19% in Australia at one point), because the world is so indebted just a small rate rise could cause an asset price implosion.

But higher rates are likely. There was always only one way from the current historic lows – up.

 

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