Monday, December 17, 2007

Greenspan Jumping on my Stagflation Thesis

Looks like more and more are coming around to my viewpoint of potential stagflation - no less than the Maestro in fact.

Greenspan Sees Early Signs of Stagflation
  • The U.S. economy is showing early signs of stagflation as growth threatens to stall while food and energy prices soar, former U.S. Federal Reserve Chairman Alan Greenspan said on Sunday. In an interview on ABC's "This Week with George Stephanopoulos," Greenspan said low inflation was a major contributor to economic growth and prices must be held in check. "We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.
  • "Fundamentally, inflation must be suppressed," he added. "It's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer-term period." (very interesting comment, notice how he throws in the word 'politically'. The Fed is supposed to be an independent entity not concerned with politics but you can only imagine the pressure being applied to cut rates going into a major election)
  • Greenspan repeated his assessment that the probability of a U.S. recession had moved up toward 50 percent but noted that corporate America's debt levels were in good shape, which should help cushion the blow from tightening credit terms. "The real story is, with the extraordinary credit problems we're confronting, why the probabilities (of recession) are not 60 percent or 70 percent," he said.
  • Greenspan said real estate prices will stabilize only when the overhang of unsold new-construction homes begins to ease, and estimated that financial losses could be in the range of $200 billion to $400 billion as securities tied to failing subprime mortgages lose value. (keep dreaming)
  • He warned against any sort of government bailout plan for homeowners that interfered with the normal functioning of markets for home prices or interest rates, saying it would "drag this process out indefinitely." Offering cash to stricken homeowners instead would cause less long-term damage, he said. (wow, while I agree with the assessment in sentence one, I was being facetious when I said we should give every upside homeowner in America $10K to help them out - apparently this is not so facetious and now something Greenspan is considering?)
  • "It's only when the markets are perceived to have exhausted themselves on the downside that they turn," he said. "Trying to prevent them from going down just merely prolongs the agony." (but it helps the 'right' people get elected in the short run)
As I have been predicting, expect all the stops to be pulled out in terms of future bailouts. The fact a former Fed chief is even floating the idea that cash should be handed out to homeowners to help alleviate the stress is scary enough. But should point you to the thinking that is going on behind closed doors. Pathetic really. Just more forms of bailing out people from bad decisions and the system that helped create it. All the while 'fired' CEOs who benefited from the system sit at home with their massive severance packages and generations of their family will never have to worry about the damages they created. What a system.

Another article out of Bloomberg today on stagflation
  • The world economy is facing the risk of both recession and faster inflation. Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.
  • The worst U.S. housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world's largest economy ``close to stall speed,'' according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.
  • ``What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,'' says Joachim Fels, co-chief global economist at Morgan Stanley in London.
  • Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a 10-fold increase in oil prices drove both unemployment and inflation above 10 percent. Still, it poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first.
  • ``Central banks don't have as much flexibility as they'd like, with inflation rising and demand slowing,'' says David Hensley, director of global economic coordination at JP Morgan Chase in New York.
  • Even so, no less an authority than Greenspan himself expresses concern. Speaking on ABC's ``This Week'' program aired yesterday, the former Fed chairman said a period of ``remarkable disinflation'' is ending. ``This is a much tougher monetary-policy environment than anything I experienced,'' Greenspan told the Wall Street Journal on Dec. 14.
  • ``The numbers are scary,'' says Stephen Cecchetti, former director of research at the New York Fed, who's now professor of international economics at Brandeis University's International Business School in Waltham, Massachusetts. It isn't just a U.S. concern. Inflation in Europe last month rose at its fastest annual pace since May 2001, increasing by 3.1 percent as food costs soared. ``The oil-price boom and rising food prices have clearly accelerated inflation developments since summer,'' Austrian central bank Governor Klaus Liebscher said in Vienna on Dec. 14.
  • Surging food prices are also pushing up inflation in China. Consumer prices in the world's fastest growing major economy rose at a year-over-year rate of 6.9 percent in November, the quickest in 11 years. Behind the burst of inflation: rapid growth in emerging markets that is lifting prices worldwide for everything from oil to gemstones.
  • The same emerging-market nations have also helped stoke inflation by sheltering their consumers and companies from rising oil prices through subsidies. That's kept energy demand in China, India and other countries high because domestic prices are still low. (a key point!)
  • If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates. Yet with growth slowing in the U.S. and Europe, central banks remain under pressure to cut.
Why this is a surprise or news to anyone is beyond me; we've been talking about this phenomenom since blog inception in August. A "World of Shortages" theme permeates. And the scary thought is even as economies slow, demographic trends will not be changing this issue. So high growth is essential to offset it. And the US is not a high growth economy anymore, no matter what the government GDP reports purport to say.

Just interesting to see more of the economic community come around to this view.... the equity markets continue to ignore it of course.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012