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Sahil Alvi
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Sahil Alvi is a management consultant, economist, intra-preneur, and writer. Sahil lives and works in Dubai. He is strategy consultant with a global consulting firm where he leads the firm’s strategic and business development initiatives including origination of strategies and opportunities for... More
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  • Could US face Stagflation in 2011? 2 comments
    Aug 20, 2010 5:11 AM

    Stagflation in the US economy is now within the legitimate bounds of possibility.

    United-States-Unemployment-Rate-Chart

    US jobless claims have reached a nine-month, seasonally adjusted high. Official unemployment figures are at 9.5%. Add to these figures, all of those workers who have taken themselves out of the reckoning and the ones who are under-employed, and we have unofficial unemployment estimates in the low-to-mid teens.

    United-States-Interest-Rate-Chart

    The overnight lending benchmark Fed Fund's Rate is at 0.25%. After the massive amounts of liquidity injections in the wake of the credit crunch, the Fed has few substantive monetary measures left to stimulate money supply into productive capacity generation, capital formation or even consumption.

    United-States-GDP-Growth-Rate-Chart

    In the face of persistently high unemployment levels and a high degree of economic uncertainty, consumption will remain lower than what is required to pull the US economy out of a potential stagnation, i.e. 3 to 4 % GDP growth. Meanwhile, real GDP growth has dropped roughly by a third from over 3.7% in Q1, 2010 to 2.4% by the end of Q2, 2010. Business lending remains anemic due to the structural constraints forged by lack of competitiveness of US producers of consumer and capital goods. GDP growth is also being affected by the US businesses not being able to borrow as readily for them to produce more goods and services in an environment where their output is already uncompetitive from a price (and sometimes, quality) standpoint compared with Chinese, Japanese, Korean, Indian, and even European counterparts. The European sovereign debt crisis has not helped matters in the US either.

    United-States-Inflation-Rate-Chart

    Despite all the quantitative easing of the last couple of years, inflation remains worryingly low at 1.2% on an annualized basis. What this means is the  massive amounts of liquidity injected into the banks during 2008 and 2009 -- will start bursting at the seams of the US banks' balance sheets at some point in the near future. Infact, Fed's recent announcement about its intended intervention, to purchase billions of dollars worth of treasuries to ensure healthy levels of liquidity in the capital markets, is likely to exacerbate this excess liquidity problem in the not-too-distant future. All of these fruits of "quantitative easing" will chase down whatever grade of commercial and consumer credit creation such liquidity can find to generate the credit business at the banks.

    Potential result of all of the above factors coming together would not be a pleasant scenario: Stagnation or worse -- on the one hand. Inflation in the price of assets, commodities, goods and services -- on the other hand.

    Could we see a nasty bout of Stagflation gripping United States in 2011?

    Charts: Courtesy - Trading Economics



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  • Luis de Agustin
    , contributor
    Comments (57) | Send Message
     
    According to strategic investment research firm, Wainwright Economics, it's stagflation, not recovery, that's roaring ahead. Expect little improvement in the US economy for another two years – and a new round of political punishment in the 2012 presidential election. Wainwright believes the Fed is completely wrong about inflation, partly because it relies on indicators based on the consumer price index, and even more specifically the core CPI. Both have been engineered so that rather than warning of inflationary pressures, they tend to obscure them. Commodity prices, led by precious metals, confirm the depreciation of the dollar that has already been underway for a full decade.

     

    Wainwright cautions, taking inflation and growth together, the US faces the worst of both worlds, namely stagflation. The fact that the Fed's QE2 initiative has pushed interest rates up rather than down is a bad sign for the future of the Fed. That reflects a fresh decline in the markets' trust in the Fed's credibility or competence. It also suggests that the Fed may be unable to prop up the bond market much longer given the inflationary threat of further dollar depreciation.

     

    Luis de Agustin
    6 Dec 2010, 06:05 PM Reply Like
  • PanamaJ
    , contributor
    Comments (2) | Send Message
     
    Great post, I'll only take issue with one thing:

     

    "GDP growth is also being affected by the US businesses not being able to borrow..."

     

    You CAN borrow, but no one WANTS to. Employers are loathe to hire until the costs of ObamaCare (per employee) is better understood. Many also see Obama & Dems as anti-business (just look as corporate tax-rates versus the rest of the world & versus the rest of the Developed World!) & don't trust that they might come up with even more self-destructive fiscal policies next....

     

    And whether it's Obama & his bankster buddies: youtube.com/watch?v=Z5... (which doesn't even mention Obama's connection to the bank lobbyists Thomas Donilon/RonKlain, Rahm Emanuel who sat on Freddie's exec board that was faulted by OFHEO regulators, etc);
    ...or his appointees from (and other connections with) the perniciously-felonious & repeatedly-disastrous McKinsey & Co (for those unfamilar, a good primer is the click on the CNN etc links in the well-cited Wikipedia entry for "criticism" on WikiP's "McKinsey" webpage), corrupt no-bid Afghan contract after calling GWB corrupt for doing the same (hypocrite), etc etc etc.
    ...or ask: "What has Obama's 10%-of-GDP deficits gotten for USA?" EU faced similar trouble, but did "austerity" instead: result was nearly TWICE Obama's dismal GDP in 2009-present, AND stronger currencies than USD. ...So, BHO & his Dem congress 2009-10 spent MORE "stimulus" than EU & got MUCH WORSE economy than EU ...this is BHO's GENIUS "fast recovery" (boy-genius also even "warned" EU not to do austerity). (When will pinkos learn that Keynsianism violates the "Broken Window fallacy"?)

     

    . . . with those factors, I'd say that real businessmen (honest & free-market people, rather than those who rely on corporate-welfarist politicians like Obama or GWB) --as opposed to Obama's bankster cronyists & similarly corrupt ilk-- have LOTS to be concerned about until (hopefully) 2013, or even 2017.
    ...Indeed, many businesses & wealthy individuals already relocated offshore:
    3x more millionaires renounced US citizenship in 2009 than 2008 per State Dept figures, then even more did in 2010...
    7 Aug 2011, 08:46 AM Reply Like
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