A New Era of Stagflation?

A New Era of Stagflation? By David Goldman.

Wages are rising fast but unable to keep up with the cost of living, and service businesses can’t find workers. What is happening to the US economy, and what caused it?

The reality is, the United States is midway through a massive social experiment that has no historical precedent. Since the start of the COVID-19 pandemic, the federal government has injected $5.8 trillion of spending power into the US economy. That’s about two-fifths of the consumption component of GDP. That has produced a burst of consumer spending, but also the highest inflation in forty years, along with chronic shortages of key commodities, supply chain disruptions, and a bulge in the trade deficit. …

We do not know whether the stimulus will produce continued economic growth with high inflation — perhaps very high inflation — or lead to stagflation, that is, cutbacks in production as well as consumption caused by inflation. …

Housing prices have risen 20% in the past year, the most on record, and rents have risen between 7% (Zillow) and 15% (apartmentlist.com) according to private surveys. …

America’s supply chains could not meet the surge in demand created by the stimulus, so American consumers bought more from the world’s largest manufacturer, namely China. The problem lies in chronic underinvestment in US manufacturing. A rough gauge of the state of US manufacturing investment is the level of orders at US companies for industrial machinery. After inflation, this measure stands at the same level as 1992, or half the 1999 peak. …

What next?

The most likely outcome in my view is that the biggest US consumer stimulus in history will produce sustained inflation in excess of 5 percent a year.

Falling real wages and shrinking profit margins will continue to depress output, and the US economy will enter a period of stagflation something like the late 1970s.

That’s Joe Biden on the right

At some point, the United States Treasury will find itself unable to borrow the equivalent of 10% of GDP per year, at least not at negative real interest rates. As long as investors are willing to pay the Treasury to hold their money for them, the US government can sustain arbitrarily large deficits. That is the brunt of so-called Modern Monetary Theory.

But the Herb Stein principle applies: Whatever can’t go on forever, won’t. The creditors of the United States will not accept negative returns on an ever-expanding mountain of US debt indefinitely.

At some point, perhaps not long from now, the US will face sharply higher interest rates and the type of budgetary constraints that were typical of profligate Third World borrowers.

Reality always triumphs over man-made schemes and fantasies, eventually. (Btw, in the ancient world, the notions of “God” and “reality” were one and the same. God was only personified later.)

China is the new OPEC.

In the 1970s OPEC limited oil supply, which pushed the price of oil up in two big oil price shocks. US President Carter then begged OPEC to increase output, with limited success. OPEC had the western world over a barrel. Now China produces the bulk of the world’s manufacturers, and has us over a different barrel.

On taking office, President Biden immediately ended US oil independence by ending the pipeline project and reducing fracking. Now the US depends on the middle east for oil once more, and oil prices are rising.

Dependent on the communists for manufactures and the Islamic world for oil. Good one, western ruling class.