Amsterdan

Stagflation, is it baaaaack?!

Amsterdan After 17 consecutive increases at each meeting since June 2004, in a rare split decision the Federal Reserve voted August 8th to hold its benchmark interest rate steady at 5.25 percent. A pause in the bombing.

Inflation continues, prompted by oil prices (orchestrated by a Middle East policy that has failed on multiple fronts, by Exxon-Mobil greed, BP incompetence, rising demand from China and India, well, you know the litany…) and continually rising raw materials prices for steel, cement, copper, PVC and other building materials in high demand in the booming Far East. But Greenspan’s almost-ready-for-prime-time replacement Ben S. Bernanke seems to be figuring on the sudden retreat of the housing market and the consequent evaporation of billions of dollars in homeowner equity to put downward pressure on prices and forestall further inflation.

The Fed is hoping we’ll all say, “My home is worth less so I’ll shop only at Walmart.”

But an observation by writer Edmund Andrews in the New York Times raises concern: “At the same time, economic growth has slowed sharply, unemployment is creeping up and productivity growth — the primary determinant of overall prosperity and the crucial ingredient in having healthy growth without rising prices — has stalled.”

Hmmm. Sure these conflicting trends happen. Ebb and flow. It takes a while to put the brakes on the US economy or to slow the creep of inflation, so sometimes there can be a brief disconnect. But look at the source of the trends.

Oil could hit $100 a barrel if any of a half-dozen known dangers materialize – Iraq civil war, Venezuelan assassination, overthrow of the Saudi kingdom, another Katrina event in the Gulf, terrorist attack in Dubai, Iranian blockade of the other Gulf – ok, I’ll stop, I’m depressed already. So in response, say the US Administration and the Fed make a couple of rash, bonehead moves – what are the odds – and maybe Kim Jong-Il accidentally bombs Tokyo and the neocons react and all of a sudden China decides to flex its economic muscle and draws down some cash from the US banking and investment system. The squeeze is on. Economies begin to react. Jobs are lost. The US economy stagnates.

BUT…inflation continues because of the oil and commodities pressures. Guess what, stagflation. A stagnating economy with high inflation. From 1979 to 1981 the US prime rate soared to a high of 21.5% (prime, not credit card rate), while costs of labor and materials continued to spiral upward and the economic metrics continued to decline. It could happen again and those of us who suffered greatly a quarter-century ago know this could get ugly before it gets better.

Is it time to hunker down?

posted by DanZ @ 10:56 AM