Stagflation Alert!

A little known economic malaise from the 1970s is now back, “stagflation”: stagnant economic growth coupled with a rapidly increasing cost of living. Economists warn that America’s debt trap will soon snap shut on millions, but its not too late to protect your wealth from the coming financial tsunami.

In the 1970s stagflation grew out of the OPEC oil embargo that caused oil prices to quadruple. Inflation surged and economic growth was stunted. Today a similar picture seems to be emerging. Investors are hoping a slowing economy will bring inflation back under control, but we already have a lot of inflation gushing down the pipeline. Concern is growing among Fed officials over the mix of weak growth and elevated energy prices.

Inflation today is rampant in big-ticket items such as; health care, utilities, insurance, higher education, food, energy and, until recently, home prices. A historic commodity boom has doubled agricultural and energy prices, while wages lag behind. Factory profit margins are being squeezed by soaring energy, raw material and transportation costs. Trade balances are negative in oil-importing nations like the U.S.

In June 2008, I issued an Inflation Alert, warning readers that inflation could spike over the next year to 7-10%. Today we face both rising inflation plus economic stagnation -- the worst of both worlds!

This week Sony Corp. President Ryoji Chubachi warned that "stagflation in the U.S., Europe and Japan is beginning to undermine consumer demand in Asia. Our concern is that consumers' buying power is decreasing." reports IHT.

Stagflation: “a weapon of mass destruction”

Last week’s spike in wholesale inflation, together with the worst housing data in over a decade, appears to support the growing stagflation argument. Here are a few recent quotes:

-- "The July inflation data had a strong stagflationary feel to it," said ING economist Dimitry Fleming to London Times. (1)

-- "There's no doubt we're in a period of stagflation now," said Peter Kretzmer, a senior economist at Bank of America Corp. in New York, reports Bloomberg. (2)

-- "Stagflation is nothing less than a weapon of mass destruction aimed at the livelihoods not only of the elderly and those on fixed incomes, but also on students, the unemployed, families, and almost everyone who has a job in the producing economy," reports Market Oracle. (3)

-- “How much longer will workers go without demanding higher pay? In July, rank-and-file employees - roughly 80% of the American workforce - earned 3.1% less than a year earlier after accounting for inflation,” reports The Day. (4)

-- "It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, that means performing ever higher value work that can't be outsourced," reports Fortune. (5)

-- "Fed Chairman Ben Bernanke didn’t use the "S" word - stagflation - but he might as well have. The financial crisis that has hammered the U.S. market is combining with rising inflation to eviscerate American economy," reports Money Morning. (6)

-- "In the 15-nation euro zone inflation held steady at 4% in July, but that figure is still double the 2% guideline recommended by ECB, increasing worries of stagflation across Europe," reports BusinessWeek. (7)

Europe is also facing a major slowdown but their ECB central bank, like the Fed, fears economic recession more than inflation. This has created fresh worries about stagflation and has pushed investors to view the U.S. as the lesser of two evils. This also explains why the dollar recently strengthened against the Euro.

I.O.U.S.A: an Empire of Debt

Many Americans no longer value the unalienable rights of, "life, liberty and the pursuit of happiness" endowed to us by our nation’s founders and our Creator. They instead value the pursuit of higher credit card limits, mortgages, debt and deficits. Worse yet is the moronic economic worldview which promises we can miraculously spend, rather than save, our way to wealth.

U.S. consumers, as well as the government, are slowly drowning in a sea of debt, as a brand new documentary film entitled I.O.U.S.A. details. The film’s inspiration comes from the 2006 book, “Empire of Debt: The Rise of an Epic Financial Crisis,” by William Bonner and Addison Wiggin of Daily Reckoning. (Read my book review)

Bill Bonner explains stagflation:
"The Keynesian economics practiced by governments and central bankers depends on deception. As more money and credit is introduced into the economy - as "stimulus" - it is mistaken for real wealth. Consumers think they have more money to spend; businessmen think they have more customers; investors think they see more profits. Deceived, they happily expand the economy. As time goes on, however, prices catch up to the funny money and the consumer wakes up to the fact that he or she is no better off than before. So, gradually, the old trick stops working. Money and credit may pour in, but no one is fooled. Instead, prices rise, while the economy goes limp." (8)

“When the baby boom generation starts retiring, that will bring a tsunami of government spending that we are not prepared for. We are in a $53 trillion hole. And that hole gets deeper $2-3 trillion a year automatically, even if you have a balanced budget,” said former U.S. Comptroller General David Walker, featured in I.O.U.S.A. to WSJ. (9)

"I believe I.O.U.S.A. should be required viewing for anyone over the age of twelve. The film presents the TRUTH about the catastrophic state of our economy and the federal government's debts, which now total more than $50 TRILLION, that's $455,000 per U.S. household!" said Swiss America broker Candice Witherspoon who attended the film's debut in Phoenix, AZ. last Thursday night.

No wonder Americans feel like they are stuck in a rut, with real estate slumping, the stock market gyrating and inflation spiking near 10%, a 27-year high! Meanwhile, the Fed has frozen interest rates until after the election on persistent recessionary fears.

“Normally, the Fed would seek to choke off inflation by raising interest rates. But with the housing and financial sectors still struggling, a rate boost could deepen and lengthen the current downturn,” reports LA Times. (10)

With the U.S. fiscal stimulus now over; income growth, in today's weak job market is also falling. Investors who rely on fixed income or interest income from T-Bills are also facing negative growth due to the rapidly rising cost of living.

In the 1950s, a single wage-earner could support a family while the wife stayed home and looked after the children. They could buy a house, a car, and household appliances, go away on vacation, and send the kids to college. Today both husband and wife must work just to make ends meet. Saving for the future is now a lofty goal.

How to rise above rising prices

There are actions individuals, families, and groups can take right now in their own lives to offset the negative effects of today’s stagflationary environment. Here are a few humble suggestions:

1. Don’t borrow. The U.S. is suffering from a chronic debt addiction of monumental proportion. We’ve now amassed $1 trillion in bad mortgage debt, $1 trillion in weak consumer credit card debt and nearly $10 trillion in government debt. Debt enslaves us to an economic system in a chronic state of collapse. Learn to live within your means.

2. Own hard money. If you have money, put it into tangible assets before its value is destroyed by inflation. Precious metal prices bottomed in August and represent a good value buy for safety and long term growth. (Read: $800 gold: buy of the year)

3. Think for yourself. Search for reliable information about the economic and political situation. Read books and turn off the TV and video games. Discuss ideas and issues with your kids, family, and friends.

4. Develop new skills. Learn to be more self-reliant. Do your own car and household repairs. Grow and cook your own food. Shop at thrift stores. Start your own part-time business.

5. Become politically active. Register, vote, and demand honest elections. Support politicians who have integrity. Read the Constitution regularly as a reminder of your rich American heritage. Demand changes in accordance with your core values.

6. Fear not. We tend to be overwhelmed by external forces such as government, corporations, banks, our credit rating, the economy, the media, armies, technology, etc. In reality, the only source of power in the universe is God. The more we realize God’s presence, the less we fear externals.

Final Thought: Jim Sinclair of Jsmineset.com sums the situation up well; “Stagflation is: Increasing costs and decreasing business activity, lower corporate profits and individual income, lower tax revenues in the face of continued high spending, an explosion in the US Federal budget deficit, continuing US Trade and Current Account deficits, a severely lower US dollar and significantly higher gold prices! Do you have insurance against the failure of the system to function? Gold is that insurance policy you pray you won’t have to collect on, but you will. Gold is going to $1,050 and onward to $1,650.” -12/07

For more suggested steps of action:
Good money for bad times –Real Money Perspectives 7/25/08