What We Are Seeing in the Economy Is ‘Inverse Stagflation’
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Editor’s Note: Are we returning to ’70s-style stagflation. Bill Bonner thinks we may be — a return to a lethal combination of high inflation and deflation of asset prices. But Sovereign Society Investment Director Eric Roseman says what we are seeing this time around is “inverse stagflation” — a mix of soaring commodity prices with deflating housing prices and bank credit.
Is Stagflation Back in Fashion Again?
By Eric Roseman
Is this the 1970s all over again?
What I mean is: Are we being pulled into an era of economic misery driven by rising inflation and skyrocketing commodities prices?
First let’s get one thing straight: This is not technically stagflation — at least not exactly.
Over the last several months I’ve borrowed the term “inverse stagflation” to best describe the current global macroeconomic environment. But because no two economic cycles repeat themselves identically, I can’t label this environment as strictly stagflation.
Instead, it’s a bizarre and lethal cocktail of skyrocketing commodity prices mixed with deflation in housing and bank credit. This is “inverse stagflation” as coined by commodity hedge fund manager, Rene Haugerud in New York.
In the 1970s, housing values didn’t collapse. Neither did bank credit. What distinguishes the 2000s from the 1970s is the credit crunch combined with a housing bear market. Those are two formidable forces. Right now, they’re both working to depress economic growth and cool rising inflation.
What most analysts fail to realize is that we can’t be in stagflation. That would imply inflation across all tangible assets, including real estate. But that’s not the case over the last 24 months as housing values suffer their worst percentage decline since the 1930s. Housing values are also declining in Ireland, England and Spain and will probably spread to other European countries before the year is over.
Also, with lending terms much harder to secure for even the most credit-worthy borrowers, the contraction of bank credit is another highly deflationary variable that is pulling the economy into the gutter.
Banks simply don’t have the excess capital they did 12 months ago prior to the credit crisis. The entire American and to a lesser extent, European banking systems are still trying to recapitalize devastated balance sheets. This whole process is certainly not coincident of stagflation. Food for thought, next time someone says we’re just repeating the ’70s — exactly.
Source: Is Stagflation Back in Fashion Again?
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Tags: bear market, credit crisis, Downturn, Eric Roseman, stagflation, US Banking, US inflation, US recessionAbout the Author
Eric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.
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