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Stagflation Light Might Strike as Early as the Third Quarter This Year

Let's discuss recession and stagflation possibilities.
Author:
GDPNow Forecast for 2021 Q3 Oct 5

What is Stagflation?

Stagflation is recession coupled with inflation. 

Great Depression era economist John Maynard Keynes thought the combination of  recession and inflation was impossible.

That should have ended Keynesian nonsense right then and there. Unfortunately, it didn't.

Explaining Keynesian 

Keynes believes in government spending, stimulus, and other economic free money prime the pump nonsense.

Governments and academia latched on to free money and stimulus ideas. Thus, it's no wonder Keynesian nonsense is the overwhelming consensus thinking. 

GDPNow Forecast

The October 5 GDPNow forecast is for 1.3% growth. That's low and at the stall rate, but seemingly not recession material. 

Look closer. Real Final Sales are the true bottom line measure of GDP.

Inventory changes net to zero over time. 

The latest GDPNow measure of real final sales is -1.0%. That is recessionary. 

If these numbers stick, third-quarter GDP will only be positive based on an inventory build. 

Case For Recession

  1. Tax hikes: Recessionary
  2. Tariffs (Biden is following Trump and threatens more): Recessionary
  3. Stock Market Bubbles: Inflationary While Expanding, Deflationary and Recessionary when collapsing.
  4. Attitudes
  5. Energy Policy: Mandating 80% clean energy by 2030: Stagflationary 
  6. Biden's $1.5 trillion to $3.5 Trillion "Build Back Better" Plan: Inflationary 
  7. Continuing Supply Chain Woes: Stagflationary 
  8. Wage Hike Escalations: Inflationary

Point-by-Point Discussion

Regarding point number 1, if any deal is signed, it will include at least some tax hikes. 

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Regarding point number 2,  Biden to Continue Trump's Chaotic Policy on China, Just More Politely

Biden is threatening China with more tariffs, even though Trump showed how useless tariffs are. Worse yet, Biden is starting from a far worse inflationary setup than Trump.

Regarding points 3 and 4, Stock market speculation is rampant. People feel wealthy and spend. A sustained stock market decline would likely curtail car buying and people chasing houses. Attitudes matter.

Point 5 is the biggest killer: Energy prices are already soaring. Forcing businesses to move to 80% clean energy by 2030 is simply crazy. 

Senator Manchin is worried about the inflationary impact of Build Back America. He is rightly worried. The question at hand is how much he gives in.

Regarding point 7, supply chain disruptions may have peaked but they have not gone away.

Regarding point 8, please note BofA Raises Minimum Wage to $21, Wage Push Inflation Will Kill Small Businesses

Three Measures of Inflation are All Running Hot

Note that Three Measures of Inflation are All Running Hot.

Finally, the Fed will start tapering, supposedly. Whether the Fed does or doesn't will likely not matter. 

If the Fed doesn't taper will be because the economy is weak. If the Fed does taper, it could easily affect attitudes.

At best, the economy is slowing. Rate cuts? Nope, not possible unless the Fed goes negative.

Yet, recession seems to be on no one's mind.

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