Were currently in a trying economic environment of high inflation, high unemployment and, slow economic growth. As economists and politicians continue to debate on which monetary and fiscal policies to initiate, much cognition can be directed towards the refuting ideal of Stagflation. As stagflation via the simple economic definition is defined as an economic period of high unemployment, high inflation, and slow economic growth. For it exacerbates recessions, and increases the likelihood of its stay in the short and intermediate term. Now the question is, "Are we currently in a period of stagflation?"
The intriguing concept is the fact that stagflation
is unlikely ever spoken, as the term has been kept hidden from most of the
media and government news channel, sources and discussions. Jeffrey Sica, chief investment officer of
Morristown, N.J. based investment firm SICA Wealth Management stated in an interview
with Money.com, "I think it's probably the biggest unspoken concern of
those of us that consider ourselves cautious or bearish as stagflation is a
real possibility that is not disused much".
From a bearish perspective, the slowing
economy along with a weaker dollar and higher commodity costs support the stagflation
argument. As inflation along with the
support of a stagnate economy induce slow economic growth. If we take a look at the GDP growth rate,
which is a broadcast indicator of the growth of our economy, the current GDP is
declining and most economic analysts have been lowering their growth forecasts
with a belief that the economy will not reach levels above 2% at the end of the
year.
The recently broadcasted figures for the
4th quarter of 2011 and 2012 put the estimate at 5.3% which was much lower than
analysts and the market expected. The
market expected quarterly figures to reflect the maturing decline, but 5.3% was
way lower than the market expected. The low Q-4 data declined GDP growth for the entire '11-'12 to 6.5%, which is about 200 bps lower than
March 2011 figure of 8.4%.
Given the
downward sloping trajectory of the following GDP figures, we can conclude that
one of the first parameters of stagflation has been achieved. As GDP growth computed on a year on year
analysis (9.2%, 8%, 6.7%, 6.1% and 5.3%)
has been declining every consecutive quarter. This simple directional
movement seems to support the argument
that the economy is growing slowly. (http://articles.economictimes.indiatimes.com/2012-06-13/news/32215461_1_gdp-growth-stagflation-headline-inflation)
.
In addition, it is now time to speak
about the greenbacks worst enemy, inflation.
If we take a look at the fact that prices are increasing all over the
country, we can conclude that prices on all goods and services are
increasing. The following two Consumer
Price Index charts below show estimates and figures for inflation as of June
14th, 2012. They were comprised by using
the same inflation metric techniques and
calculations used in 1990. The Consumer
Price Index on the Alternative Data Series reflects the CPI as if it were calculated
using the same inflation techniques used in 1980.
In simple terms, techniques used by the
government to calculate and report CPI,
have depressed inflation reporting, changing the methodologies and
concepts of the CPI away from being a metric of the cost of living needed to
carry on a constant standard of living (http://www.shadowstats.com/alternate_data/inflation-charts).
The following two charts were retrieved
from the Shadow Government Statistics website on June 14th 2012. (http://www.shadowstats.com/alternate_data/inflation-charts).
As you can tell, both Consumer Inflation
charts show different variances, as the Shadow Government Statistics index
takes into account the Real adjusted figures for inflation and help support the
indicator that inflation is currently still in a long term uptrend. It is well comprehended that the CPI grossly
under calculates the real increase in the cost of living. If you were to abolish all the biases and manipulation
that the government uses in its inflation calculation we can further see that the
inflation rate is about 7%
(http://www.foxbusiness.com/economy/2012/06/08/ready-or-not-stagflation-is-here/)
.
In addition, if we take a look at the
recent April 2012 Figures for the Wholesale Price Index and the Consumer Price
Index. We can also support the argument that inflation is rising. Hence,
supporting the second condition of stagflation. As the Wholesale Price Index
(on a year by year basis) came in at 7.23%, after having declined to 6.89% in
March 2012. On the other hand the CPI
index, which measures price increases on a rural and urban consumer consumption
basis, reported a 10.36% increase, compared to 9.38% in March 2012 (
http://articles.economictimes.indiatimes.com/2012-06-13/news/32215461_1_gdp-growth-stagflation-headline-inflation
) .
Furthermore, were on to the final and
third component of the stagflation argument known as high unemployment. At the time of this report, the current unemployment
rate is about 8.1%. But a more accurate level of unemployment is
reported by the BLS (Bureau of Labor Statistics) section U:6 of the BLS reports
that the rate of unemployment is
approximately 14.5%. In any exact month,
both the size of the labor force and the number of people considered unemployed
might change, because the figure takes into account both variables. Hence it is
much easier to manipulate the figures and move people out of the labor force to
make the figures appear smaller
(http://www.foxbusiness.com/economy/2012/06/08/ready-or-not-stagflation-is-here/)
.
The following chart below reflects the
current seasonally adjusted SGS unemployment reporting rate, calculated
with an adjustment for SGS estimated long term discouraged workers, who
were represented out of official existence in 1994. The calculation is combined
to the BLS estimate of U-6 unemployment, which includes short term discouraged
workers. The U- 3 Unemployment rate is
the monthly headline number while the U-6 unemployment rate is the BLS broadest
unemployment measure, including short term discouraged and other marginally
attached works as well as those forced to work part time because they cannot
find full time employment (http://www.shadowstats.com/alternate_data/unemployment-charts).
The following chart was retrieved from
the Shadow Government Statistics website on June 14th 2012 and supports the
argument behind the high unemployment up trend.
(http://www.shadowstats.com/alternate_data/unemployment-charts).
In addition, Wealth manager, financial
advisor, and consultant to Fox Business News currently reported that the labor force is at a 30year low,
while only 63.7% of the population is working.
If you put this in simple terms, 36% of all people in the United States
are not working. The last time the labor
force was reporting such low numbers of this stature were during the last
period of intense stagflation that occurred in the 1970's (http://www.foxbusiness.com/economy/2012/06/08/ready-or-not-stagflation-is-here/).
In conclusion, stagflation can be seen
as the worst of both worlds. On the
contrary, the current economic period has added a 21st century twist. With the Fed consistently trying to stimulate
growth via the pushing of short term rates down to near zero, affecting money
market rates. As long as the current economy remains stagnate, the Fed will
continue to keep rates at all time lows. This interesting concept leads to the
parable that if stagflation does come into sight, it could be very damaging to
money markets in the long term.
Furthermore, it is still very early to be concluded, but the stagnate
economy supported by high gas prices at the pump and rising inflation could definitely
put a nail on the stagflation coffin.
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