Nearly all central bankers are terrified of deflation, which is when the prices of goods and services decline as time goes by.
The reason they are afraid of deflation is because it creates a death spiral, since people do not consume today expecting lower prices for the same basket of goods and services tomorrow. So they postpone consumption and, as a result, no production is desired today. Thus the whole economy gradually slows down and stops.
While deflation is a serious issue, I believe stagflation is probably a much worse affliction and has possible negative social connotations that are much worse than deflation's is. Deflation is akin to boiling a frog alive as you gradually turn up the heat, thereby he does not notice the gradually rise in temperature. Deflation sets in gradually and kills you a little bit each day, but nothing dramatic.
Stagflation is when you have stagnation in growth rates along with inflation in your day-to-day life. So as you can imagine we have a double whammy with stagflation. There is no growth in the environment, which means no jobs or no real jobs with real growth behind it. Added to that sad state is a heavy dose of inflation. So as your wages hold steady, if you even have a job, the costs of living in all areas around you go up. This will ensure that your standard of living declines as time goes by. This is the stuff social revolutions are made of.
A few days ago, the World Bank lowered the overall growth rate for the world to 2.8 percent from its previous forecast of 3.2 percent. I am not sure what the World Bank officials were using to estimate a 3.2 percent growth forecast in the first place when you have the United States stalling, Europe dead, China slowing down a fair bit, Brazil (in fact South America) struggling to keep pace and India, which is full of hope, growing currently at 4.2 percent. But for now the global growth rate lost nearly 13 percent of projected growth rates for 2014.
Right on the heels of that, the International Monetary Fund lowered its U.S. growth rate projection from 2.8 percent this year to a measly 2 percent. So we lost 40 percent of projected growth rates for 2014. This time we cannot even blame the weather for the slowdown. How the mighty have fallen. Nearly a decade and half ago, when the United States slowed down, the globe shuddered and reduced its own rates of growth. Now the world slows down and the United States reduces its growth forecast.
While I have always maintained that the blame on bad weather was nothing but a cop out from facing hard facts, now we have lost all pretenses and acknowledge that we will only grow at 2 percent. Mind you, this 2 percent is based on the convoluted methodology used since the third quarter of last year, which adds at least 1 percent to 1.5 percent to growth. If we take this away, the United States might be in recession.
Add to this woeful story, the lack of real job growth. I am not talking about the headline numbers that the media feeds off and people buys stocks on. I am talking about no real jobs, no real wage growth, no real labor participation rate increase. We are really in trouble here.
To make matters worse, we are now noticing inflation everywhere; even our own Federal Reserve admits it. Fed Chairman Janet Yellen has conceded that the way the Fed measures inflation might not be the correct way and it may be missing the broader picture. Folks, that is about as close we will get to have the Fed acknowledge they are wrong.
No jobs, no wage growth and no growth. A classic disaster of epic proportion awaits.
If you see the 10-year note tick up to 2.75 percent or higher, I would recommend thinking of shorting Treasurys again. The irrational exuberance of tapering and rates going up sooner rather than later is a fairy tale that will soon get crushed.
Go forth and prosper!
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