Stagflation's Worldwide Strangulations

by: Enzio von Pfeil

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.