Money Sage (archive)

Enough "flations" in there for you, folks?

To paraphrase what a late Vice-President of the United States once said in another, and very inappropriate context, "When you've seen one "flation" you've seen 'em all".

Or, maybe that isn't quite true? No, it's not. For the truth of the matter is there are "flations" and there are "flations," to coin a phrase.

The latest hullabaloo is over the reputed, multiple sightings of that dreaded enemy, "stagflation." This ungainly word describes an ugly economic condition, one characterized by economic "stagnation" (recession, really) accompanied by rising inflation. Yuk.

Before proceeding with our analysis of "stagflation" possibilities, we wish to make one teeny, tiny observation. "Stagflation" is a SCARY word, conjuring up as it does, to borrow the name of a very good film, "The sum of all fears." What this means, as our devoted readers know, is that the media can make hay -- financial hay, that is -- by hyping up this newly-revived fear. FEAR, as we have observed on mulitple occasions, SELLS newspapers, talking head TV viewership, and financial pronunciamento readership. Consequently, FEAR is the primary staple of financial journalism. We can expect to hear lots more about this new BOGEY-MAN. "Stagflation," in fact, is a very versatile and very serviceable bogeyman. The financial media can hardly harp on "INFLATION" in the midst of cratering house prices and sliding global equity markets. Even the most dim-witted would perceive this "threat" as the sham it is. Nor do they DARE mention the word "DEFLATION," as this would invite the WRATH of those they fear. Moreover, they have so effectively brainwashed themselves that the possibility of deflation has never so much as crossed the threshold of their somniferous "intellect."

The case for "stagflation" is roughly as follows:
1. Growth is weakening (that's the "stag" part)
2. Oil and gasoline prices are: soaring, surging, skyrocketing, exploding. They are not merely rising, of course. (Why didn't anyone tell us when oil was $25/barrel 5 years ago, when it might have done us some good; why do the newsies always bring us the news too late, and why do they thump their chests at a long-running trend which is on the cusp of REVERSAL??)
3. Basic agricultural commodities, metals, steel are -- fill in the exaggerated adjective.
4. The FED is emphasizing "reviving growth" and fighting the "threat of recession."

Now, let us see. What could possibly be wrong with this "analysis?" Our first observation, we suppose, is our application of our LAW OF TENSES. As we have noted in a long ago post, financial journalists, media wizards, and Wall Street prognosticators have a consistent propensity to "predict the past." This tendency is typically operationalized via TENSE CHANGE. Thus, instead of the word "has" -- which would present an accurate HISTORICAL STATEMENT -- they substitute the future or future conditional tense -- "WILL," "IS LIKELY TO" etc. (as if "IT" has NOT ALREADY OCCURRED). The merry game of "predicting" the past by projecting what has happened into the future via verb tense change, ignoring that it has ALREADY HAPPENED AND BEEN ENTIRELY MISSED BY THE "ANALYTICAL" AND JOURNALISTIC CONFRATERNITY, once again manifests itself in the current environment. Yes, we DID have a stagflation. It occurred in the early '70s, and ended by 1982, if memory serves. Correct us if we are wrong, but do we not currently reside in 2008 A.D.?

Well, let's get on with it. With point number one -- growth is weakening -- we have a not-so-slight problem. Growth, in any meaningful sense of the term, has ENDED. Whether we are technically in an overall economic contraction, or merely on the cusp of one, there is "growth" only in isolated pockets of the economy, particularly those servicing Asia, and a few others. More to the point, there are very substantial reasons to infer that we may well be on the threshold of a severe and protracted economic downturn, fuelled by a collapse in residential real estate prices unlike any we have seen since the 1930s. Ditto the situation in the all-important banking system. The issue is entirely misrepresented by the phrase "weakening of growth." What we are looking at -- and in certain economic sectors already experiencing -- is DEPRESSION, as no less an inflation-phobe than Mr. Poole, President of the Federal Reserve Bank of St. Louis, characterized the situation in the home-builidng and housing sectors.

As for point number 2 -- energy prices -- they have indeed HAD (as opposed to "are" or "will have" -- a tremendous run. This run has been fuelled not only by rising demand in Asia and supply constraints, but by strong demand from a ROBUST American economy, and by demand from tolerably strong economies in Europe and Japan. The key western demand prop for oil price acceleration has disappeared, and will in all probability weaken MUCH FURTHER. Moreover, the Asian economies depend upon the American consumer, increasingly notable by his absence. Without the continued vast influx of American consumer dollars, the great Asian export/infrastructure game cannot continue, certainly not at the pace of the past 5 years, and certainly NOT at an accelerating pace. This fundamental change is completely ignored by the STAGFLATION FLOGGERS.

As for point number 3 -- commodity prices -- the analysis provided re. point #2 is equally applicable.

The final point, we think, is the most important. It is important because it is, we believe, profoundly misleading. The issue is NOT, as the STAGFLATIONISTS would have us believe, that the FED is risking INFLATION and STAGFLATION because it is overemphasizing "reviving growth" and fighting the "threat" of recession. The issue that confronts the FED is the serious risk of a general deflationary collapse and the onset of a protracted, depression-like economy. The bursting of the credit and housing bubbles, the de facto collapse of the dangerously overleveraged and reckless banking system, and the contraction of household liquidity with disturbing implications for future household SOLVENCY combine to produce a threat whose magnitude is unlike any we have witnessed since the 1930s.

Moreover, the equity bear markets in Asia -- bear markets which include the markets in the super-charged, perennially high growth countries of China and India -- are not mere happenstance, in our view. These markets are looking ahead, as equity markets do. They do not like what they see. What these bubbilicious markets see is economic deterioration in their own overheated economies and markets, and deflationary possibilities inherent in continuing credit tightening by their own central banks.

Moneysage 2008 ©