Stagflation in the economy is a persistent high inflation combined with high unemployment and stagnant demand.
Inflation destroys consumer purchasing power. The creation of money and credit does not create prosperity. It's a form of taxation on the consumer. "Stimulus spending typically creates the short-term illusion of prosperity at the long-term price distortion, ruining the economy and debase the currency."
"Stagflation is the type of inflation typically caused by an expansion of the money supply and bank credit ahead of gains from productivity and asset growth. More money and credit chasing fewer goods and services typically means higher prices over the long run." This is the kind of inflation that we have been subjected to first by Greenspan and now by Bernanke of the Fed followed by all other Central Banks of the world.
"Price inflation may also remain initially muted because excess liquidity can first find its way into stock, real estate, or bond asset bubbles. It may encounter a prolonged delay in running up commodity and consumer prices."
This excess liquidity has already found its way into stock, real estate and bond prices, and now it's finding its way into commodity prices, too, although our leaders are supposed to be looking at this kind of problem they all are asleep, or lying, or both.
Easy credit killed the consumer and can be seen as the main cause of today’s crisis. When Central Banks started to flood the market with money to whoever wanted to have it, the global spree of mainly workers themselves started to consume beyond their means, by buying things they didn’t need with money that wasn’t theirs. The FED and associates wanted to flood the market with money to keep the economy growing and running whether a recession could have been avoided! The philosophy was to put money in everyone’s pocket to have that spent on anything as they did, to let economy grow to the detriment of consumers.
This unparalleled ocean of artificial liquidity will surely lessen the effects of the recession, however the unplanned consequences do cause INFLATION to be followed by STAGFLATION that will wipe out the savings of millions of people. It will become the “Bailout Bombshell” without solving the economic crisis that more and more is becoming a depression.
Nevertheless this applied approach, is making a bad crisis even worse. In the end it are the taxpayers that pay the bill. As a result meanwhile commodity prices are rising, economists differ as to how much the rising oil prices affect GDP, but almost all of them agree that rising oil prices do cause a decline in GDP at least to some extent.
An upcoming oil crisis –Iran- would force families to stretch their already overburdened budgets even farther. The average price of gasoline is rapidly climbing up. Everyone believes it is going to be significantly higher. High oil prices are going to influence the cost of just about everything to go up, and high oil prices are also going to cause the economy to slow down thus making the unemployment numbers even worse.
If families have to spend €10 or €20 more each time they visit a gas station, that means that they are going to have less discretionary income. They won't be able to spend as much at the stores. Not only that, but since the price of oil affects the price of almost anything else, people will find that their dollars/euro’s have reduced purchasing power.
Nonetheless our leaders believe they still can print up more paper money, which is as good as the real stuff, in order to resolve this severe recession that causes INFLATION, and thereafter STAGFLATION followed by HYPERINFLATION.
But realize this recession is not a recession, because there is no buying opportunity. It’s already a depression that could take a long, long time to recover.
The difference between a recession and a depression is best explained as follow: A recession is a pause in an otherwise healthy, growing economy. A depression is when the economy drops dead. And when it drops dead, the assets that people owned as stocks, bonds, houses, derivatives, and even debt are all called into question. No one knows what these are worth, now the economy that created those, no longer does exist.
That’s the present biggest uncertainty. The majority of businesses that were set up to provide products and services to the consumer binge economy will not survive, all the debts and obligations that the consumer economy produced are no longer viable.
But eventually, unless the Central Banks stop the process of money printing, which they won’t, things will sort themselves out. Businesses go broke. Homeowners are distressed. Automobiles go back to the dealers or are reposed and auctioned off. Prices sink to a level where people are able to buy. And the whole process starts over again. This can take a long, long time, particularly when government is trying to stop it with injecting more money into the market.
What is needed is above described period that Schumpeter called creative destruction. It will take time before a new economic model takes shape. Then, the markets tell us what are valuable assets and what those are worth.
There is still more to follow. Meanwhile the best you could do: spread these messages and wisdom to your friends for a better understanding about the state of affairs of today’s crisis where we are in. It certainly will help to speed up the recovery process!
By Peter B. Meyer - 1st of February 2012
Some regular readers requested for more information on the effects of hyperinflation. For a complete insight, first a few essays on inflation and deflation and its consequences.
The modern rivalry between gold and paper money will end like all others before. Gold always won.
A villain named John Law (1671-1729) is the protagonist of this modern history. He killed a guy called Beau Wilson in a duel. Then he went on the first flight to Scotland, from there to Amsterdam, and finally to Paris. Like Alan Greenspan and now Ben Bernanke, to learn a way to make money he made himself useful to people in high places - in this case the Duke of Orleans, who desperately needed money:
"I have the secret of the philosophical stone discovered," he said, "it is the way to gold paper."
We no longer need to search for gold. John Law was perhaps good with numbers, but not so with his philosophy, because that failed. One thing cannot be at the same time two things. It's either gold or it is paper. Rarity and durability give gold value as money. Paper has the distinctive feature just to be the opposite - it is not scarce, and it wrinkles so it can blow away.
John Law's new invention increased the amount of money that France helped to create an economic recovery - at least so it seemed. But ultimately, his philosophical mistake became visible, because gold has real value. If you can create money whenever you wish why not print more of it? It was just a matter of time before it became clear that too much of it was printed. Soon there was an angry mob at the door of his office in Paris on Rue Quincampoix. People who had acquired his paper gold began to see its value in a different light. Once cherished as paper gold, appeared to be nothing other than plain paper.
Law's idea enlarged the money supply; it increased by 300% in France. Prices in Paris doubled between 1718 and 1720. When, his new money system collapsed, the Duke of Orleans started “to print even more of it." In the year 1721, Law's money was worthless. So the word "Bank" for the next 200 years was a dirty word in France.
The current experiment with paper money began on August 15, 1971. "From now on," said U.S. President Richard Nixon, all foreigners who want to do business with us loose the right to exchange their dollars for gold. From that moment, the value of the U.S. dollar was determined by what someone gave for it. Philosophers then held their breath. But nothing happened. Many died meanwhile, because waiting for the dollar’s collapse took too long. The millstones of monetary history may be slow, but the longer it lasts the more fingers are trapped.
The resulting paper money standard caused a global credit expansion - just as then in Paris after John Law’s application. Again, the U.S. Federal Reserve prints U.S. dollars, which the citizens spend.
These dollars as reserve currency are building up around the world, and each central bank is doing its best to keep up with the same printing process. Soon, exporters over-produced because importers consumed too much. And so it happened that the world is awash of too much money (credit expansion) that came into circulation.
The first victim of this was the Japanese economy in 1989. The next victim was the crash of the Dot.com High-Tech sector on Wall Street in 1999. Finally, in 2007, the entire (financial) planet became a big bubble, which imploded. Suddenly, the whole world was in the same economic situation as Japan nearly 20 years earlier. And now, every nation follows the example of John Law, by issuing paper gold in the form of banknotes, through providing promises on loans and bonds - as if it were the Banque Royale from then. It is estimated that Europe for its necessary financing does have a short fall of € 3 trillion. America may need at least 4 to 5 trillion more. How long can this go on? To where will this lead?
"There are no means to prevent an eventual collapse, caused by excessive credit expansion," wrote Ludwig von Mises (1881-1973). "The alternative is only whether the crisis comes earlier rather than later as a result of voluntary abandonment of further credit expansion, or as the final and total catastrophe of the collapse of the currency system is fact."
If Japan continues on the road where it goes, the country will go bankrupt states S&P. Japan leads the way to the future, a monetary minefield. Their current deficit - a record – is more than its tax revenues with a public debt seven times larger. Caused by living beyond their means.
"No natural life survives this live cycle. And no paper currency has ever survived a full credit cycle. " It's only a matter of time until we see the explosion.
By Peter B. Meyer – 5th of February 2012
Credit expanded for half a century. The Bubble Era at its end caused trillions of dollars worth of errors. Many of those errors have already been corrected. But the bubbles that were built remained unresolved. Exporting nations had gotten into the habit of earning net sales from the U.S.A. and the EU of over $3 billion per day. Those earnings provided much of the speculative capital that created the Bubble Era prices, with money that was kept too cheap for too long by the Feds and other central banks. Meanwhile this money has disappeared in thin air.
Instead of a healthy new boom, the world is enjoying a sick reverberation of the previous economic era. Governments, led by the U.S.A., attempt to re-inflate the bubble with guarantees and giveaways equal to an entire year's annual output of the world's largest economy. Since every dollar of this money is borrowed, it makes the implication that every dollar has to be withdrawn from the world economy at some point.
In fact, economists are already looking ahead to the moment when deflation fears give way to severe inflation fears.
It was on that day that the European Central Bank (ECB) "loaned" roughly 500 billion euro to Europe's major banks at 1% interest. This capital will allow all the big banks to report adequate capital ratios when they file their annual reports, which is code for "getting a huge bailout."
Whatever you want to call it, simply know this: There will not be a deflationary collapse in Europe. The euro will not collapse in the near term.
Instead, Europe will see a gigantic increase in its money supply.
When asked by the Financial Times: “ if there was any substantive difference between what the ECB was doing - printing money and "loaning" it at 1% - what exactly the FED has been doing since 2009 - printing money and buying mortgages and Treasury bonds -ECB President Mario Draghi replied, "Each jurisdiction has not only its own rules, but also its own vocabulary. We call them 'non-standard measures.' They are certainly unprecedented. But the reliance on the banking channel falls squarely in our mandate."
Let me translate Mario's political nonsense: "There is little difference. We are printing money to bail out deadbeat borrowers and big banks."
Whose interest is put first: that of banks, or the “real” economy? Of course, the banks’ interest and not our economy. Why not promote economic recovery by writing down debts to reflect the ability to pay, rather than relinquishing more wealth to an increasingly aggressive creditor class?
The world has meanwhile created a gigantic debt bubble that will end in a massive inflation. Sovereign borrowers from around the world choose to inflate their debts away, rather than suffer the consequences of actual defaults and restructurings. The reluctance of some members of the European Union - Germany, in particular - will not change the inevitable end result.
Soon, there will be a massive financial-led economic rebound, thanks to government-manipulated, ultra-low interest rates. In the short term, millions of people will cheer these moves, as the risk of any economic pain apparently has been removed.
But this resolution is a hallucination; instead of wiping out the bankers, brokers, and politicians who approved these bad debts and were enriched by them, these bad debts will now be paid for by the millions and millions of taxpaying people who rely on the two major global currencies – the euro and the dollar. The trillions of euro’s/dollars in bad loans will be paid for through inflation. It's an invisible, secret tax that not 1% of common people even understand.
Over time, the result of these actions will be an immensely lower standard of living, thanks to declines in purchasing power and increasing commodity prices. Real wages will be much lower, as employers will not readily increase wages to keep up with inflation.
Volatile paper currencies will make it harder for entrepreneurs to invest and source products and services across borders. The so-called "wealth gap" will dramatically increase, as inflation will escalate the purchasing power of the rich - whose assets will increase in value - while the poor – who have no ready means to protect themselves from inflation – are further impoverished.
And, as surprise to the politicians who think easy money and bigger annual deficits are the path to greater centralized power, the coming inflation will cause massive social unrest. Occupy Wall Street is merely a sign of what is to come. Soon, the protesters won't merely march past the homes of the wealthy and the powerful, they will firebomb them.
The stability of our currency – or any nation's currency – is ultimately a reflection of the stability and reliability of culture. It was the corruption in Nixon’s Government that led to the paper money system in use today. Many people forget that until 1971, gold-backed money – sound money – was a privilege every American enjoyed. Not anymore. View attached graph and you’ll see excessive accumulated inflation rise in after 1971.
Today, under a solely paper system, the entire monetary system is controlled by the political class, which has the power to allocate capital or to deny it. Thus, the world's capital markets, rather than acting as capital allocators, have become merely speculative marionettes, whose strings are controlled by the well connected and the influential.
To avoid becoming the lackey of Western governments and their paper scheme: Instead of storing your wealth in soon-to-be-debased paper currencies like the dollar and the euro, store your wealth in gold and silver. Although these "anti-paper money" metals have climbed substantially in the past decade, schemes like the above described ensure they will rise much higher in the coming years.
This essay explains how the game will be played. While the weak currency policies of the major nation states will impoverish their citizens, they will never be allowed to impoverish the Elite, who will only grow richer and far more powerful. The only question is how long will the game continue before the side effects of higher prices, lower wages, more social unrest, turn this game into disaster?
"Deflation is a structural, and not a monetary phenomenon." Deflation occurs when prices are declining over time. This is the opposite of inflation; when inflation rate is negative, the economy is in deflation.
Causing a decline in general price levels, often caused by a reduction in the supply of money or credit. Contraction in spending, either by government, or private sector, consumers, can also cause deflation. Deflation often goes together with increasing unemployment due to the lower level of demand. Deflation punishes investments that can raise people from poverty, both personal investments, and business growth.
In our private consumer lives, we all are for deflation. In fact, we look around to find ever-lower prices. We reward businesses like LIDL, ALDI, Wal-Mart and Dell who can sell us things we want at prices lower than paid before. Their sales increase even as the prices we pay decrease.
Price deflation is the natural by-product of a productive, competitive economy. In a competitive free market, we should expect prices to come down over time, as various businesses try to find ways to get consumers to buy their products or services. Price makes a big difference.
So why is everyone so worried about deflation? Deflation can have a very dark side. It is one thing for a business to cut prices because they have figured out a way to lower costs. It is another thing for them to have to cut prices because there is too much product produced by all their competitors.
Such a "deflation" in prices results in lower profits. When this happens to a multiple and large segments of the business world across an entire country, it is called a recession, as businesses cut spending and employment.
And therein lays the concern in economic circles about deflation. No one is actually concerned when prices drop for good reasons. The concern is when prices start to fall because of too much supply and lack of demand. This typically precedes a recession.
The economy faces both the deflationary forces of the worst recession since the 1930s and the vigorous inflationary response of the Central Bankers, who have in effect cut interest rates to zero and rapidly expanded their balance sheet.
Inflation is a vague occurrence and containable, while deflation is far more destructive.
Everyone knows that stimulus leads to inflation. While it’s known that the Central Bankers undertook the most daring use of stimulus ever attempted. In fact it seems likely that soon the most severe inflation will occur ever witnessed. But it's not that simple. It's too obvious. Under these circumstances, inflation would be no surprise.
People understand the threat of inflation because it happens frequently. Practically everyone anticipates rising rates of inflation. “The adjusted monetary base of the US and EU have more than tripled in the past few year. Deficits are staggering.”
Still consumers won't consume like they're supposed to. Suddenly, it's the 'Age of Thrift.' At present 70% of the economy is consumer spending. Until that changes, the economy is hostage to consumer spending. When consumers stop consuming, the economic wheels stop turning.
The greatest trouble still is too much debt. Both in the private sector and in the public sector that at last will cause even bigger problems when eventually governments default by causing hyperinflation, which is worse than the depression originated by deflation.
Tags: deflation, inflation, economy, economic crisis