From Peter Reagan at Birch Gold Group
Recessionary times are bad enough on their own.
But an inflationary economy that isn’t growing, has a rising unemployment rate, and out-of-control spending can be even worse.
In economic terms, that’s known as stagflation.
From our deep dive on the subject, stagflation is more specifically defined as:
an economy that is shrinking, remaining flat, or growing at a very slow rate. When a nation’s gross domestic product (GDP), a measurement of all the goods and services produced in the country, either fails to grow or actually shrinks, economists will say the nation is economically stagnant. The relevant definition here is “showing no activity; dull and sluggish.”
There are three general characteristics of a stagflationary economy:
- Higher-than-average unemployment rates. Higher unemployment means there are fewer workers to contribute to increasing supply; at the same time, unemployed individuals will be very conservative with their spending, reducing demand and tamping down economic growth.
- Reduced consumer spending. Because consumer spending is a critical component of economic growth, reductions in demand contribute directly to a reduced GDP.
- Increased money supply. When central banks expand money supply or create credit, this directly contributes to higher prices, fueling the inflation portion of stagflation.
In early January, the threat of a stagflationary economy started to take shape according to this investor survey conducted by Fox Business:
Around 92% of fund managers expect a period of high inflation and low economic growth next year, while 0% are forecasting a Goldilocks scenario, in which the economy avoids a recession and inflation slows.
“Investor sentiment remained uber-bearish,” the survey said… “77% are calling for a global recession.”
In terms of consumer spending, the engine that powers two thirds of the nation’s economy, we’re seeing signs that households are already stretched to the limit.
As Phillip Patrick told John Solomon earlier this week:
In response to a combination of rising prices and climbing interest rates, the American consumer whipped out their credit cards. And now consumer debt is at a record high, just under $5 trillion, including $1.25 trillion credit card debt. I mean, people are using buy-now-pay-later for groceries! This is clearly insane behavior…
A general slowdown in consumer spending, which may just be prudent behavior for any individual family, is bad news for many businesses.
On top of that, as you can see on the Fed’s official chart below, there hasn’t been much more than sluggish economic growth since inflation started to run hot over two years ago.
If you’re trying to make the case for the “greatest economic growth in history” as President Biden has, this sluggish growth doesn’t help that case much. It also appears to confirm the threat of stagflation.
Which brings us to the present, where that threat back in January is becoming reality…
Waking up to the reality of stagflation
As always, the recipe for stagflation includes inflation. In the scenario that looks to be developing right now, core inflation is taking center stage according to an op-ed by Peter Navarro:
But here was the buried lead: Core inflation remains stubbornly high at 5.3% – more than twice the 2% Fed target.
Just how long will it take to get core inflation down to 2%? The answer is grim: certainly not days, likely not months, and almost certainly several years.
In addition, the piece adds another dire prediction: “if core inflation rekindles, as it well might because of the massive overspending by the Biden regime and associated demand-pull inflation pressures, the Fed may have to resume its rate hikes.”
Why? Deficit spending creates more dollars, the same way the Federal Reserve can print money out of thin air. When the Fed is trying to reduce the money supply, but the federal government is doing the opposite, the Fed may be forced to compensate by hiking rates even higher.
Let’s remember, the Fed’s dual mandate requires them to control inflation and maintain maximum sustainable employment.
Usually, that’s a difficult balancing act – raising interest rates to cool inflation generally increases unemployment. (Higher interest rates discourage business expansion by increasing the cost of capital. Similarly, higher rates discourage borrowing by households.)
Inflation has already been running hot since June 2021. So far, though, the employment situation has been strong since the pandemic panic eased in 2021.
Unfortunately, that’s changing…
Work force participation, projected unemployment turning sour
The employment situation in the U.S. could get worse over the coming months:
In most of the ten US states with the lowest and highest unemployment rates, initial claims are trending both higher and at an accelerated rate over the past three to six months. This is at odds with the current publicly available federal unemployment data.
On top of that, there is also the Worker Adjustment and Retraining Notification (WARN) Act data, which reports 60 days of layoff data from companies with 100 employees or more.
Layoffs have been increasing overall for the last 7 months:
On the basis of both initial claims for unemployment (in both high and low employment states) and WARN filings (in 39 US states), unemployment is rising rapidly. More importantly, those increases are not currently being captured in the reports of the Bureau of Labor Statistics (BLS) or other federal sources.
If that weren’t bad enough, jobless claims are on the rise and work force participation hasn’t returned to pre-COVID levels.
Labor force participation has been flat since January 2022. In other words, reality disputes the claim that people are returning to work despite President Biden’s claims.
In fact, Biden’s job “creation” record so far amounts to nothing more than a recovery of jobs lost during the panicked reaction to the COVID pandemic.
Taken together, this is yet another stagflation warning.
The Fed projects that situation won’t get much better in the year to come, either. According to their data, unemployment will rise to 4.5% throughout all of 2024.
Don’t put too much stock in Fed forecasts, though – as Phil told Steve Bannon earlier this week:
Two years ago, the Fed projected year-end 2023 interest rates at 0.6% (despite 5.4% inflation back then). Considering today’s rates, they were only 775% off – good enough for government work!
That’s right – even the best and brightest ivory tower economists who control the nation’s money supply have no idea what the future holds.
This brings us to the main question to ponder…
How long could stagflation last?
Michael Busler, public policy analyst and a Professor of Finance at Stockton University informed us that in order for this stagflationary economy to recover, “Biden will have to reverse the policies that caused the problem.”
(Close your eyes for a moment and try to imagine any high-profile politician admitting they were wrong. You can’t, can you? It’s certainly beyond me!)
In Busler’s view, fixing the problem starts with energy supply:
With respect to energy, Biden must allow the Keystone Pipeline to be built and stop canceling permits for other pipelines. Admittedly it will take about a year for the Keystone Pipeline to provide oil, but it will signal that the administration recognizes oil will be an energy source in the future.
Biden isn’t likely to do that unless political pressure overcomes the urge for spending from his side of the aisle. In the meantime, fuel costs will remain higher than they would be in a free market, thanks to this interventionist anti-energy policy.
So the bottom line is this: The economic landscape isn’t likely to recover any time soon. Employment doesn’t look good, the Fed is actively struggling to manage inflation and the Biden regime seems determined to continue their reckless fiscal policies that have led us to this point.
We can’t do much about the overall economic environment – instead, I encourage you to consider taking responsibility for your own financial stability.