Home     Writers     Op/Ed     Book Reviews     News     Bookstore     Photoshops     Submit     Search     Contact Us     Advertise  
  You are here: 

Fri

25

Jan

2008

Stagflation is Here
Friday, 25 January 2008 02:15
by Rodrigue Tremblay
War—after all, what is it that the people get? Why—widows, taxes, wooden legs and debt.
- Samuel B. Pettengill
 "Armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few.
- James Madison, 4th U.S. President (April 20, 1795)
"Let me issue and control a nation's currency and I care not who makes its laws".
- Nathan Rothschild, 1791
Last summer, I observed that there was a "solvency crisis" underneath the ongoing subprime mortgage liquidity squeeze. Central banks can alleviate a "liquidity crisis", but they cannot solve a solvency crisis. Last year also, before the events, I warned that the U.S. was heading toward stagflation. This was due to three fundamental factors. First, the structural fiscal imbalances of the federal budget in a period of prosperity, as a result of the Bush-Cheney administration's continuous deficit spending linked to the Iraq and Afghanistan wars and to its large tax cuts; second, the over-indebtedness of the overall U.S. economy coupled with an overall saving rate close to zero (in 1981, it was 12 percent), and, as a consequence, the rapidly increasing foreign debt of the U.S.; and, third, the required decline in the U.S. dollar to reverse and correct the deteriorating American balance of payments. The second factor was a harbinger of less consumer spending in the coming months while the third factor would stoke the fire of overall inflation. And with already high budget deficits, there would be less leeway for an aggressive fiscal policy to sustain economic activity. The table was thus set for a bout of stagflation, i.e. slow growth and rising inflation.

Now, stagflation is here. —Economic growth is slowing down, M3 money supply numbers, as a measure of overall liquidity in the economy, are in the double digits range, the yield curve has inverted and become negative (short term rates higher than longer term rates) and the U.S. dollar has become one the weakest currencies in the world. All this as American twin deficits (balance of trade and federal government budget deficits) are at record levels. —As I pointed out last year, " A lower currency translates into more imported inflation and makes it difficult to maintain low interest rates," even if, in due time, it will improve the trade balance. This means that, for all practical purposes, monetary policy is also severely constrained in what it can now accomplish. For all of 2007, inflation hit 4.1 percent, which is two-thirds more than in 2006 when inflation registered at 2.5 percent. Moreover, the surge in wholesale prices announces even higher inflation in the months ahead.

With inflation being on the rise and real interest rates already in negative territory, aggressive monetary stimulus would likely be counterproductive, because too low interest rates would encourage capital outflows, pushing the dollar further down, and translating into more imported inflation. On top of that, one has to remember that monetary policy shifts take at least nine to twelve months before impacting the real economy. One has also to keep in mind that the U.S. operates, more and more, in an international environment, and is less and less capable of influencing the domestic economy by manipulating one variable only, such as the interest rate.

Of course, the Fed could have played a better preventive regulatory role if it had intervened in 2003-04 to reign in the unsound banking lending practices that have led to the subprime debacle. But the milk is out of the bottle now, and nothing can erase the damage done to the housing construction sector and other parts of the economy because of this lack of oversight.

After seven years of continuous indulging, of borrowing and debt building, the U.S. federal government is also in a fiscal bind and will find it difficult to effectively counteract the slowdown in the economy. Indeed, over the last seven years, the Bush-Cheney administration has run fiscal deficits on the average of $461.29 billion each year, for a grand total of $3,229 billion of cumulative of on-budget deficits.

This makes it harder to embark upon a new round of deficit spending to stimulate the economy. For one, fiscal policy shifts have even a longer time horizon before impacting the real economy. Secondly, the coming slowdown and recession will worsen an already high federal government deficit, as government receipts decline with the rise in unemployment and the drop in income growth. On the spending side, the Iraq war, in particular, is a black hole that siphons off more than $100 billion each year, with no end in sight. Oil prices are also very high, partly because of high world demand, partly because of geopolitical instability and partly because of the lowered dollar.

After seven years of foreign policy madness and of empire building on a mountain of debt, and of public indulging and private gouging, the financial crisis and credit crunch, the plummeting dollar, the high price for oil will all contribute to the 2008 economic slowdown, which is likely to turn into a recession, during the first half of the year, if it is not already into one since last December. The downturn in the world stock markets during this month is another clear indication that something is wrong, not only with the U.S. economy, but also with the world economy.

All that would seem to be very bad news for George W. Bush's Republicans, just as it was bad news for the Democratic Carter administration in the late '70s. Indeed, over the last century, the U.S. economy has been in a recession four times in the early part of a presidential election year, according to the National Bureau of Economic Research. In each of those years — 1920, 1932, 1960 and 1980 — the party of the incumbent president lost the election.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@yahoo.com He is the author of the book 'The New American Empire' Visit his blog site at: www.thenewamericanempire.com/blog. Author's Website: www.thenewamericanempire.com/ Check Dr. Tremblay's coming book "The Code for Global Ethics" at: www.TheCodeForGlobalEthics.com/
 
More from this author:
The Iraq Occupation and the Coming War Against Iran: Political Wickedness and Moral Bankruptcy (5254 Hits)
by Rodrigue Tremblay "Justice is as strictly due between neighbor nations as between neighbor citizens. A highwayman is as much a robber...
The Neocons' Crazy Dream of World War III (4790 Hits)
by Rodrigue Tremblay "There are roads one does not follow. There are armies one does not strike. There are cities one does not attack....
A Financial System under Siege (4193 Hits)
by Rodrigue Tremblay "If these items [promised benefits in Social Security, Medicare, Veterans Administration and other entitlement...
Questions About the Financial Crisis (4680 Hits)
by Rodrigue Tremblay "The problem [of loan defaults] will be significantly bigger next year [2008] because 2006 [mortgages] had ...
Mr. Ban Ki-moon and the Future of the United Nations (4447 Hits)
by Rodrigue Tremblay [The] "recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is...
Related Articles:
Treacherous Road to Oslo Begins Here (8270 Hits)
By Ramzy Baroud Attempts to coerce Palestinians into submission have not always manifested themselves in the crude form of a tank, a bullet,...
Wish you were here (a small sampling) (11303 Hits)
by Mickey Z. Estimates vary, but roughly 50,000 animal and plant species become extinct each year. That¹s over 130 per day, about 6 per hour....
This Here an’ Dat Dere (4789 Hits)
by William Bowles One of my earliest musical influences was the great Julian ‘Cannonball’ Adderley, whose music to this day still makes...
Exclusive: Earl Grey Killed Litvinenko. You Read It Here Last. (5935 Hits)
by Copydude By now, you’ve all read the latest crackpot teapot story. So without further ado, I’ve written to one of the hacks who...
Been Here - Done This (And did it much better) - Morality in the Cold Universe (4157 Hits)
by Stephen P. Pizzo American GIs getting killed in an illegal, immoral war thousands of miles from American soil. Our leaders warning us that,...


Add this page to your favorite Social Bookmarking websites
Trackback(0)
Comments (6)add comment

DAVID said:

0
IT"S COMING SOON
SCHOLARLY WRITTEN and well researched
Real inflation is 14% as the cpi you quote is good to make a comparison as you did .Real inflation is more important to understand the pressure that is upon the system I predict that real inflation will rise to 25-30% in the next year and a half
what we see before us is not only the tip of the ice burg ,but the effects will be felt harder and last longer than any of down turn,due to the fact that personal savings are negative for Americans today.
The numbers are also wrong ,not in your report that is a well written document ,but rather in the numbers being put out by the U.S. Govt.
What it all indicates is that the U.S. Govt. was and is complicit in trying to swindle the world with fraudulent instruments.This will make a bigger impact than the instruments themselves ,as it will lead to the world devising a mechanism for global governance of international money markets. which will further impede any future attempts to swindle the world,causing The American economy to buckle. If they lied to the world about the value of the instruments,what else are they not telling us. Certainly trust can no longer place around the world as such all banks are in locked down mode and investors are nervous.
Once the rest of the loses are known, I believe that the American Economy will be bankrupted .Which will bring the economy and the NWO along with it
down into a pile of poop .

Thanks for your great Report Sir


 
January 26, 2008
Votes: +0

C. Wyatt said:

0
Response to David
Sir,

I do agree with much of what You had to say, however, do not believe for a minute that the downfall of the U.S. economy will bring about the end of the NWO. In fact, the downfall of the U.S. is an important step in bringing about the NWO, which is not headed in Washington, but is actually a plan being implemented on a global basis. The leadership of Russian, Iran, and China are just as committed to the end of freedom and liberty as our politicians, and economic warfare (in the form of inflation and debt) is the perfect tool to carry out this goal on a worldwide basis.
 
January 26, 2008
Votes: +0

Andy said:

0
A new direction
To quote a song I really like:
"When the stock market crashes we all take a hit;
But to our benefit, cause it's all counterfit..."

We have an unbelievably corrupt system that is crumbling from the inside out at the moment. But this must occur in order for the Western (G-7) nations to come to their senses and realize that governments being blindly led by the almighty "market forces" leads to chaos and injustice. Hence the fact that 30,000 children die every day in hunger and extreme poverty while the US and other countries flood their own farmers with excess subsidies that then cheat out local economies in poorer countries. We are taking more interest in loans from poorer countries than we give back in official development assistance! This is a crime.

What we need is a new direction, a new framework that sees the economy as being controlled by us, not us being controlled by the economy; that maintains a sense of freedom and entrapraneurship but places environmental and social concerns as top priorities; that encourages multi-laterlism in terms of development and development aid; that promotes self-sovereignty among nations and establishes a practical set of policies that ensure corruption and illegal accumulation of power and wealth among elite groups is no longer allowed.

We need to save the starving millions dying in poverty in this world of plenty! I think there are serious solutions underway, and great ideas being formulated. See the link below if you're interested:

www.global-commons.org
 
January 26, 2008
Votes: +0

bob said:

0
...
One of the big reasons America is broke is the collapse of the middle class in part due to illegal aliens driving down wages. Americans need to stop this with grassroots efforts like: WWW.AMERICANPATROL.COM
 
January 28, 2008
Votes: +0

Norm Colbert said:

0
Investor
The bond market insurers MBIA and AMBAC have had their credit ratings of triple A lowered by conscientious experts that would lose their jobs if they failed to tell the truth. The "rules" call for these bond insurers to sell their companies to another party that is 100% financially solvent and at the same time fully cover what they have insured. Thecan't and don't want to do this. They are some of Americas richest and want a bail out. Norm
 
January 28, 2008
Votes: +0

Schmidt said:

0
Is that you?
Is this THE Norm Colbert? Long time, no speak.

Dave
 
February 27, 2008
Votes: +0

Write comment
smaller | bigger

busy
 

adsense

Top