Stagflation's Worldwide Strangulations

Excerpts from Dr. Enzio von Pfeil's May 29, 2008 appearance on Channel News Asia:

1. Inflation remains a big concern.
   • Particularly stagflation – which is characterized by higher prices AND lower (if any) growth.
   • We have “called” stagflation since 2006.
   • Crucially, as this is cost-push inflation, Central Banks can not do so much about it. After all, even a Central Banker’s ego cannot manage crop cycles or mineral cartels!
2. Inflation has limited impact so far because there's no wage price spiral.
   • As we discuss next, that is the good news (no wage spiral).
   • But, as we will also discuss next, the bad news is mounting political tension.
3. But, will that scenario change?
   • Yes: the political implications are not good.
   • We are seeing food riots in Egypt, and rice export bans in parts of Asia.
4. This is not good news for the man in the street - wages can't compensate for rising prices.
   
   • Hence the food riots and thus food export bans.
   • Think of cost-push inflation, particularly as regards food, as a “tax” hike. The result is that the population at large has less discretionary cash to spend.
   • Thus, less consumption leads to a worsening of The Economic Time™: it morphs from an “excess demand for goods” to an “excess supply of goods.”
5. Are there options to deal with rising inflation?
   • It is very tough to control cost-push inflation.
   • It looks like tighter money is ahead, or, in the jargon of The Economic Clock™, an “excess demand for money.”
   • This excess demand for money gets exacerbated by banks lending less and less, as we already see in America.
   • Whenever there is an “excess demand for money,” that, in conjunction with an “excess supply of goods,” implies that corporate profits wane – and that will be bad for markets as stocks have to get re-valued, based on weaker earnings.

Comments

[whidbey:]

The chatter on Wall Street is that the Fed is finished and rates will stay constant or tighten in the next few months, maybe by year end. From this assumption they seem to feel that the dollar strengthens and the US market becomes attractive and buying piles in. Why would anyone want to hold US equities with the consumer down and exports hurt by a rising dollar? I think stagflation is a real concern, and I think equities will do better than bonds. I respect your analysis, but I think we must prepare for a longer shake out.

2008 May 30 11:10 AM

[Emerald:]

The chatter on Wall Street is meant to pump stiocks as insiders sell on new "highs"! Corporate profits will wane as the consumer is getting crushed.

2008 May 31 02:55 PM

[ed auerbach:]

Read Biggs in todays WSJ. There is $3.5 Trillion in money market funds!!! earning 2% or less. Where do you suppose those funds will end up? Thats $ 3.5 TRILLION. 3.5 thousand million.

2008 May 31 03:49 PM