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Could US face Stagflation in 2011?

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


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.


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.


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.


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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