Stagflation Prediction
Ray Dalio agrees – the Fed is going to cut rates and go back to QE but it’s not going to work. We’re heading for stagflation. https://t.co/v0Gqla2ceT
— Peter Schiff (@PeterSchiff) July 18, 2019
Nah!
I suggest deflation.
Asset bubble bursting events are inherently deflationary.
Of course, we need to define inflation, deflation, and stagflation with a look at how the real economy actually functions.
Debate Challenge
Lance Roberts at Real Investment Advice agreed to sponsor a debate. I have alternates if that won’t work.
Given we agree on many things, it does not have to be a heated exchange.
Schiff and I agree free markets and on gold. We both see the current monetary inflation.
There is no need for this to be personal, and won’t be if we stick to the topic at hand.
What’s Coming and Why?
I am confident about my reasons.
How confident is Schiff?
Mike “Mish” Shedlock
I believe that both are right, it just depends on where you look, within the US financial system there is an excess of USD due to the effects of QE, but outside the US, in Eurodolars there are shortages of USD, due to multiple reasons, an interbank activity (TIC) that does not exceed the levels of 2007, collateral shortages, partly thanks to that same QE, but also because the same USD shortage creates a feedback effect where non-residents must sell financial assets in the American markets to obtain liquidity , the repratiacion of profits and the commercial war, both diminishing the flow of USD outside the US financial system… So you can see a stronger dollar compared to other currencies, even when there is a massive loss of purchasing power of the dollar within the US, but located in the financial sector, art and some real estate and luxury goods.
Of course it depends how well you said it about the definition of inflation.
Regarding whether the collapse of the bubble will be deflationary or not, I do not dare to give such a firm answer, it is by definition deflationary, yes, but in a system where in a sufficiently acute panic state the Central Bank can print infinite amounts of money, if the collapse produces inflation or deflation it is a decision with political content, not exclusively of economy.
I think deflation is unlikely with all fiscal and monetary constraints completely gone. Fed will QE and Congress will run trillion-dollar deficits. That should be enough to prevent deflation.
Schiff doesn’t want to debate you because you syndicate your posts on anti-semitic fake news dumps like Zero Hedge
Don’t wrestle with a pig (or anti semites)
Not sure where inflation comes from when the population/economy is pickled in debt. The minute that the owners of the debt, which is heavily short-term adjustable rate, sense any inflation, lending will stop and/or interest rates will rise. Preventing inflation.
Most strong inflations have occurred only in populations for which debt was minimal, and/or after a lot of debt defaulted in a deflationary economy.
So deflation it is, at least for a while… Although the experience in the US (and other chronic trade debtor economies) may very well be quite different than in economies that have run surpluses over the years to fund the US trade deficit.
Colorado – You cannot edit comments
I can – I requested a 15-minute edit period for everyone – I will bring it up again
You’re challenging a straw man (Schiff) with a consistant gold-bug bent and a straw man issue. Instead, we’re following the Japanese and are going to have deflation in spite of increasingly lower interest rates. (Check on Dr. Lacy Hunt/Van Hoisington, Satyajit Das, etc. for theory as to why.)
However, to agree with Dalio, it is hard to see the extention of will-be negative interest rates, without the conclusion of fiat money. But this, if it would happen, is in the long term.
At some point I’d believe that a responsible Fed head would emerge and stop this from happening. Volcker arose when we were going into runaway inflation in the latter 1970’s. Fortunately Volcker, with his double digit interest policy, had the support of Pres. Reagan.
Got 20 year old vehicles,perfect record,my premium just went up 10%…..in 6 MONTHS,where’s the deflation?Pickups approaching 100 grand ,even the Chinese junk at Walmart prices rising almost ….daily,again where’s the deflation?
Someone has to pay for all those uninsured motorists when they get into accidents.
Open borders have consequences.
The deflation argument is totally bogus and the supporters of this position are not very bright, to put it mildly. The prices of pretty much ALL the ‘needs’ (food, energy, healthcare, insurance etc) will continue to go up irrespective of any crisis or bear market. The deflation that follows a bust will be almost exclusively in assets i.e. everything subject to significant leverage – housing, financial assets and so on. In other words the only real deflation will be in the balance sheets of the wealthy.
Both could be right – depending on the timeframe. Mish could be right about deflation in the wake of the bursting asset bubbles. And Schiff could be right about the longer term consequences of QE4, QE5, QE6 and so on.
That’s what I think too. I think there’ll be a deflationary punch in the gut when the bubbles burst but stagflation in the long run after that because there’ll be moneyprinting galore.
I hope he accepts. I’ll watch the debate.
We are all turning Japanese now…
You have the correct answer. The Dutch pulled 2 percent inflation out of their ass, and now it is an Economic Law. Economists are not licensed by the State. In Colorado I have a license to certify financial statements. The woman that cuts my hair has a license, but economists are like the weather girl, no one sues them when they are wrong.
well, maybe the japanese on their own could get away with it but what if the whole world goes Japanese and consequently Zimbabwean ?
I will buy a ticket….at deflated prices of course
I can somewhat agree here with ColoradoAccountant, and in order to understand where I am coming from you will have to agree with an anecdotal point of view of my own, I am a disabled vet with a finance degree and a limited fixed income, I am only paid 12 times per year and while it is (was in 2008) borderline entry level middle class at $48k and change for a single guy living in semi rural southern Oregon it is anything but that now. I say the cost of living here has risen by about 50% since 2011 and I have had paltry COLA increases amounting to 8.6% meaning I have lost at least 40% of my disposable income to inflation in the last 9 years or so.
That is not unique at all, in fact I am still at more or less the median wager earner income (though not household income which is about $61k) but the point here is that inflation is far higher than we are being told, mind you my rent is almost doubled just since 2013/14 lease was due to renew. Auto insurance is up in excess of 400% (in 2013 I paid $60 per month to insure a new 2013 BMW worth $57k, that same car is now worth about $13k and my January premium works out to $203 per month though I am now over 60, have lower coverage, and still have a clean driving record) and food is up at least 50% with a few exceptions (like subsidized milk which by the way I detest).
The reason I want to point all this out is that our data is so massively fictional how can you tell where GDP is? Or real interest rates?
For PEOPLE we are going to see stagflation, and as to definitions which a fine little debate seems to have started, all recessions/depressions in the old days were deflationary, while all boom times were inflationary, that was a given till the 1970’s when we had inflation during a downturn and recession. STAG=STAGNANT economy flation= inflation. STAGFLATION. The fact that both were so protracted and seemed immune to any cure is what had them so worried.
So, solid rising prices during economic non performance or even contraction is all that means. If inflation is higher as my theory suggests then we are already are in a contraction, and have been dragging along near one for much of the “recovery” post GFC. The employment numbers are every bit as misleading as the inflation data. That employment has shown a better economy than really exists is easy to do when the numbers are fictional.
As the wider population loses real purchasing power to inflation that is just not reported, or denied, means a larger and larger share of their income goes to the basic necessities and I assure you that is centered on housing, groceries, and insurance just as in my case. I have slashed my budget to the bone, where I used to enjoy a number of little luxuries I now do not. Those things we cannot afford anymore see falling demand and will either have lower prices (deflation) or they will cease to be sold as unprofitable. While those basic necessity things we all demand that are going up in price will gain price momentum (inflation) in part because the providers of those things think we are willing to pay for them and if they put basics into shortage the price of inelastic demand goods will indeed skyrocket. Inflation is thus self reinforcing among such items.
Starting in the late sixties and especially the seventies we saw a lot of basic industries just fail in the USA as people had to stop buying all but basic items, we did not have global markets and low wage nations to import from and I suggest that will again be the case. When you have year in and year out inflation it does build on itself, it feeds on itself. At the end we had several years of double digit inflation while we considered ourselves lucky to get 1-2% in raises, or to have any job at all. I was in the service then, it was a nightmare. When I got out in late 1979 unemployment in my California county was over 30%. That is stagflation and trust me when I say it is horrifying to live through.
You are correct that inflation is understated by the BLS. My property taxes doubled from the previous owner because I was forced to overpay for a house to be within two miles of my only grandchild. Then it increased 15 percent. TheColorado courts have ruled that the pension must be paid, but the COLA NOT. Inflation and WWIII are my enemies.
Hey Mish, my edits don’t take.
I could never understand why the financial press or the financial media ever calls out the deliberate lies the monetary politburo publishes. They are deliberately suppressing the truth so they can finance their never ending deficits with low interest rates. This is why the middle class is suffering and the gravitation towards socialism is becoming more and more mainstream. People know something is wrong but can’t figure it out. Why do you think the Russians went communist, it was because the peasants were being screwed by the elites until they revolted. I am not saying its better but this is what happens when people get sick of being screwed by the elitists running the govt.
They don’t call out the lies because they would be frozen out of any information stream, valid or not.
Would be an awesome debate…I agree with Schiff about stagflation. I think the Fed and lawmakers will have no choice but to paper over the coming pension crisis. We will be like Japan although our demographics are better. Debt overhang will continue to cause sluggish growth at best and the FED and lawmakers will do anything and everything to keep asset prices elevated and appreciating
Even though I love Mish and believe that Schiff is correct, but too early (the same as being wrong), I agree with you. I remember the dollar as a silver certificate, but not a gold certificate. Now it is a petrodollar. We have pledged our blood to the House of Saud to preserve the petrodollar. Fracking has thrown a curve ball into that, but fracking is way too expensive last beyond a couple of elections.
Daniel Lacalle has totally debunked the ”we’re turning Japanese” meme. Just FYI. And I agree, the scenarios that we’ll face are totally different. He concludes: “(Japan’s situation) cannot be transferred to the rest of the world, because the result would not be Japanese-style stagnation but Argentina-style crisis chain.”
I was in the deflation camp after the GFC, and was surprised by the inflation in assets like bonds, stocks, pick-up trucks, and real estate. In hindsight, courtesy of the Bernanke. I just bought Tips, and paper gold because I think inflation will now begin to show in the CPI, especially food.
Yup, it’s already starting to show. I think I read the other day that the CPI has been above the Fed’s target 2% lvl for 16 straight months. One day this will catch everyone unawares. For now though most are looking in the wrong direction. Also a potential trend change in Treasuries — 30yr yields have already broken out decisively from their long-term downtrend. The topping process could take a little time but it’s well worth keeping an eye on.
Stagflation is a misnomer. It means high inflation, and stagnant real GDP. With the stati-stink office calculating the inflation, I trust there will always be growth.
Why bother?
Schiff has been consistently wrong on $US and Treasury market.
Disinflation/deflation on tap until debt overhang addressed.
Just in case you hadn’t noticed, the US 30yr peaked some time ago (2017 if I recall) and is ‘topping’ at the moment. Very good chance of a long-term bond bear market. Can you imagine that? And what it’ll do to stocks? Schiff may well end up being right, even if a little early. Either way, it should be pretty obvious that the fiat money system is on its last legs.
30 yr bond yield heading to 1% (or lower).
Enjoy.