Is stagflation taking hold?  In our dreams, maybe, since its impact would be relatively benign in comparison to the economically lethal debt deflation now spreading from financial assets and real estate into the consumer economy. The Wall Street Journal, among others, seems to think that a combination of recession and persistent inflation is about to bring back the stagflation dirge of the 1970s.  And while the following headline on yesterday’s lead story in the Journal may have gotten the facts right, it entirely missed the implication of those facts for the not-so-distant future: “Fears of Stagflation Return/As Price Increases Gain Pace.”

That’s true enough, at least for now. But our own theory, first broached here more than two years ago, is that the price increases we normally associate with inflation would eventually become deflationary. After all, how can the price of goods and services continue to soar if incomes are not rising commensurately? For tens of millions of Americans whose wages have barely budged in real terms, a rise in the price of gasoline means that they will have to consume less of somethng else. Nor is real estate inflation compensating any longer for the shortfall. In fact, property values are falling, and this can only further constrain consumer prices from rising in the future.

Big-Ticket Items

That doesn’t mean that grocery store items that we cannot do without will necessarily fall in price, at least not right away. But the big-ticket items such as loaded SUVs, vacations and kitchen remodels certainly will, since demand for all of them, and for many other luxury items, is about to dry up as the country slips into deep recession or worse.

We should also point out that in the 1970s, even with the oil embargo, gas rationing and high inflation taking their toll, the U.S. economy was in much better shape to weather such adversity. For one, we had a robust manufacturing sector; now, our most important export by far is arcane financial products whose intrinsic value has suddenly, and perhaps  catastrophically, become unknowable. And while debt of all kinds totaled in the low hundreds of billions of dollars back then, these days it aggregates into the hundreds of trillions of dollars.  Make no mistake, that sum represents the as-yet-unactualized power of deflation, and to imply that it will somehow remain in abeyance in the form of a pesky stagflation is like insisting the Titanic would stay afloat because only its lower compartments were taking on water.

Deflation is about to seep like seawater into all areas of the economy, taking it down to crushing depths. Under the circumstances, only an ignoramus or a blind optimist could believe that mere stagflation will persist as asset values continue to fall across-the-board, unemployment rises, and investors suffer devastating losses caused by the implosion of inestimably large debt.   

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Better Than a Guru

When the Hidden Pivot seminar that was held earlier this month sold out, I added an additional session on March 8-9. If you’d like to attend, click here  for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time.  If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.