Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stranguflation: Deflation and Inflation Where it Hurts America Most

Economics / Deflation Aug 03, 2010 - 07:20 AM GMT

By: Janet_Tavakoli

Economics

The U.S. is suffering from high unemployment combined with too much consumer debt in a weak economy. Current stock market exuberance reflects earnings increases at selective companies that benefited from sputtering stimulus programs. In late 2007 through the fall of 2008, our economy had an appendix attack, and Congress issued potent addictive painkillers instead of fixing our problems.


Meanwhile, the financial system has strangled U.S. growth by parasitically growing from 3% of GDP in 1965 to 7.5% of GDP currently. As Jeremy Grantham pointed out in his quarterly letter to investors, financial services were sufficient for the economy when they were 3% of GDP, but that sector grew by strangling GDP growth elsewhere. The nation's GDP growth slowed from 3.5% in 1965 to 2.4% between 1980 and 2007, and the slowdown occurred before our current crisis.

In other words, our bloated financial sector has been sucking the life-blood out of the U.S. economy for years, and recent decisions insure it will continue to feed off taxpayers, while the host economy struggles for life.

Jobless "Recovery"

Unemployment exceeds 10%, counting the underemployed it is closer to 20%, and the figures soar beyond that when one counts our unemployed youth. The recovery is being strangled in its crib by low job creation, high consumer debt, high local government debt, high federal government debt, and falling tax revenues.

Since the first meltdown, we've had rising--and still very high--consumer loan defaults. The Fed tried to monetize bad loans, which is just another way of saying the U.S. taxpayer is paying for bad lending decisions by Too Big To Fail financial institutions.

Nominal income is falling. Selected prices have fallen more rapidly than income, but we've had a negative wealth effect. Housing prices and investment assets fell in value. Consumer loan payments of debt-loaded consumers have to come from falling nominal income.

If we didn't have too much borrowing (leverage) in our system, the Fed's rapid pumping of money into the economy might have worked. Unfortunately, consumers and many financial institutions are still overleveraged and many of them will default or fail. This continues to be a drag on the economy and on consumer demand.

Deflation Plus "Staple" Inflation

The economic picture is distorted by both deflation and inflation. Interest rates are low for now, but consumer demand also remains too low. Banks are unwilling to lend to all but those who don't need money in the first place. The negative wealth effect of reduced home prices, a weak housing market, and reduced value of investment accounts and retirement accounts is combined "staple" inflation on items like school tuition, utilities, certain food items, and even mundane items like printer paper. Many prudent investors and consumers are unwilling to borrow, even at low interest rates.

Moreover, consumers are worried about potential local tax rises and federal tax rises, since many local government's are broke, and our national debt is $13 trillion.

If deflationary pressures combined with rising prices on many consumer items weren't bad enough, many investors are carefully watching long-term U.S. treasury interest rates in case demand for U.S. debt falls and inflation takes off.

The economy's stranguflation is the result of wealth destruction and the quadruple threat of the weak economy, high government debt load, asset deflation with price inflation of essentials, and the fear of future overall inflation.

In October 2009, I explained to Max Keiser of The Kaiser Report, why the economy would suffer an ongoing deflation crunch (instead of the stagflation I had originally expected):

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2010 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in