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What Does UK Stagflation Mean For US And Western Economies

Tyler Durden's picture





 

When a few weeks ago we predicted that while contagion was the word of 2010, stagflation will define the current year, we had no idea how fast there would be glimmers validating our outlook. Yesterday's UK GDP data was the first datapoint that showed a decline in GDP even as the BOE's Posen infamously announced a day before that that UK inflation was surging. That, ladies and gentlemen, is the definition of stagflation. Coming soon to a banana republic near you.

Below we share Goldcore's outlook on what UK's slide into stagflation means for the reas of the world.

Stagflation in UK a Real Risk to US and Western Economies, via GoldCore

What were termed "shock" UK GDP figures yesterday, led to falls in the FTSE and the pound sterling which fell against the dollar and gold. Sterling's fall saw sterling gold prices rise from £833 per ounce to over £842 per ounce after the news.

Economists were once again surprised by the very poor UK GDP figures which showed the economy has contracted by 0.5% rather than growth of 0.5%. This clearly shows that the UK is now experiencing stagflation or high inflation and very low or contracting economic growth.

Gold's strength in pounds continued this morning and it has risen to over £846 per ounce. Counterintuitively, UK bonds were bought and the yield on the 10-year fell 5 basis points to 3.62%. These gains have been given up this morning, and given the degree of the economic contraction and the fact that inflation looks like remaining stubbornly high for the foreseeable future, UK gilts will likely soon come under pressure with a corresponding rise in long term interest rates.

Inflation in the UK is, according to government figures, 3.7 percent, which is almost double the BoE's target and likely to rise further in the coming months. While the consensus of most economists is that a return to recession is unlikely and inflation will not become a long term threat, unfortunately they will likely be proved wrong once again. The double-digit rates of inflation seen in the 1980s are quite possible again and should not be rejected in a knee jerk reaction to fit preconceived notions.

Some economists are already spinning this as "stagflation-lite" when the reality is that they do not know how severe the stagflation could become. It is as ever best to err on the side of caution and hope for the best but acknowledge the real risks of less benign scenarios. The uber bears continue to warn of hyperinflation and while that scenario does not look highly likely at this time - it is important to acknowledge that the current monetary pathology of the Federal Reserve and some other central banks may lead to an international currency crisis.

Investors and savers should prepare accordingly rather than being complacent and inert with the attendant deleterious consequences.

 


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Wed, 01/26/2011 - 09:59 | Link to Comment Haywood Jablowme
Haywood Jablowme's picture

 

This will be stagflation to the nth fucking degree here in the USSA. 

High unemployment/underemployment, higher costs for the necessities, more/increased sales taxes and/or income tax rates reminiscent of the 30 individual tax brackets of 1935 to the top 94% tax bracket in 1945 to milk you dry, ponzi digital dollars soaked up by the black hole vacuum of the derivatives shit-pile, while liquid dollars & assets found nowhere amongst the low, middle, and bottom half of the upper class.

http://www.taxfoundation.org/publications/show/151.html

Like Mr Sinclair has mentioned many times before, "QE to infinityyyyyy and beyooooooooond!" 

Hyper-stagflation biznitches.

Just a matter of time before the US breaks up / states secede like that rusky predicted.  Perhaps at that point, the rebuilding can begin.

 

 

Wed, 01/26/2011 - 10:01 | Link to Comment HoofHearted
HoofHearted's picture

Let's see some Thomas Woods here on ZH. Let's talk all about "nullification."

Wed, 01/26/2011 - 11:55 | Link to Comment whatsinaname
whatsinaname's picture

The FTSE is actually have a nice day today even after yesterday's GDP news. I guess recessions are good news these days..

Wed, 01/26/2011 - 08:54 | Link to Comment Racer
Racer's picture

I thought the 'stag' part was short for stagnation, yesterdays figures showed contracting

So shouldn't it be Conflation?

Wed, 01/26/2011 - 17:56 | Link to Comment StychoKiller
StychoKiller's picture

The stagnation portion of "Stagflation" refers to wages.

Wed, 01/26/2011 - 08:56 | Link to Comment max2205
max2205's picture

I am confused. I thought the Govts were only producing / manufacturing good news!? Or was this data really much much worse than printed?

Disinformation everywhere

Wed, 01/26/2011 - 09:15 | Link to Comment tmosley
tmosley's picture

This has primarily been the case with the US and to an unknown extent China.  I haven't really heard of the UK fudging numbers, though it certinly wouldn't surprise me.

Wed, 01/26/2011 - 09:19 | Link to Comment blackbox
blackbox's picture

they don't tend to outright lie, they just make up whole new ways of measuring statistics when the old ones don't suit.

Wed, 01/26/2011 - 17:58 | Link to Comment StychoKiller
StychoKiller's picture

Mis-reporting the Truth is still a lie, even if done by the "numerically-challenged!"

Wed, 01/26/2011 - 08:59 | Link to Comment Oh regional Indian
Oh regional Indian's picture

In real terms? Actually? UK's stag flation means that the UK will continue to print/conjure up still more pounds to keep buying more and more of the currency of last resort, via the most liquid and assured investment of the UST market, backed by the full faith and f%^%ness of the US gov.

Meanwhile, Brits will continue to chatter in the cold and drink warm beer, eat curry and sing songs at Football games and fight.

ORI

http://aadivaahan.wordpress.com/2010/06/18/of-tipping-points-and-shape-s...

Wed, 01/26/2011 - 09:45 | Link to Comment Paper CRUSHer
Paper CRUSHer's picture

Yep,cold beer and some good ol' hot fish n'chips sure do go down well,a bit like the U.K. economy...Hah

As a kid i remember singing,"London bitchez fallin' down, fallin' down....."

Wed, 01/26/2011 - 12:24 | Link to Comment WakeUpPeeeeeople
WakeUpPeeeeeople's picture

That would be greasy fish n chips and warm beer.

 

Why do Brits drink warm beer?
Because the factory that builds the Jaguars also builds their refridgerators.

 

 

 

Thu, 01/27/2011 - 05:51 | Link to Comment synonym
synonym's picture

WUP

The temperature of something affects our ability to taste it. You cannot taste something that is cold as well as something that is lightly chilled.

We serve beer (ale actually) lightly chilled because we can actually make beer, rather than the alcoholic brother of a soda (i.e. fizzy, rank, chemical rubbish that most US beer is) that we masquerade under the name. We serve largers cold.

BTW, it's not just the UK that does this. You'll find Europe serves ale chilled rather than cold too, as that's how it should be served...DuffMan.

 

Wed, 01/26/2011 - 09:01 | Link to Comment sudzee
sudzee's picture

UK is in great shape financially. They are sitting on a half trillion of treasuries gifted via the FED from the US taxpayer. Hell, cash out, pay off debt and live happlily ever after.

Wed, 01/26/2011 - 09:04 | Link to Comment YHC-FTSE
YHC-FTSE's picture

Stop saying stagflation! It isn't 1975, and the pattern is certainly not the same.

Wed, 01/26/2011 - 09:58 | Link to Comment Haywood Jablowme
Haywood Jablowme's picture

 

Stop saying stagflation! It isn't 1975, and the pattern is certainly not the same.

 

You're right.  It's much fucking worse.

 

Wed, 01/26/2011 - 09:13 | Link to Comment blackbox
blackbox's picture

don't worry, they've got the media saying it's not really that bad because

(a) it snowed (in winter of all times??! whatever next?) - so snowy numbers aren't real (unless they're positive of course) and

(b) you don't have to believe bad numbers because they will surely be replaced by better numbers next time round (http://www.independent.co.uk/opinion/commentators/hamish-mcrae/hamish-mc...)

apparently we are all to "focus on the signals that we can actually trust"

like those from the BLS or the next ADP numbers perhaps?

Wed, 01/26/2011 - 09:41 | Link to Comment emsolý
emsolý's picture

Stagflation in UK a Real Risk to US and Western Economies

It's refreshing to see that the US kind is no longer considered a Western economy.

Wed, 01/26/2011 - 09:42 | Link to Comment dcb
dcb's picture

I realize there are multiple tyler durdens, and you are right to pat your back often, but I have seen the forcasts change from deflation, to hyper inflation, now to stagflation. as someone who has been in the stagflation camp for a very long time the post is a bit insulting.

I have argued we have been in stagflations for a long time, but that depends how you decide to measure the metrics. I defined it as asset prices out of wack to eonomic activity.

Wed, 01/26/2011 - 09:46 | Link to Comment Josephine29
Josephine29's picture

American readers may not be aware that a speech on UK monetary policy was given yesterday by Governor of the Bank of England Mervyn King. According to notayesmanseconomics he set this criteria for the Bank.

An appropriate monetary response is to accommodate the first round price level effects, while ensuring that changes in the published twelve-month inflation rate do not alter inflation expectations and lead to second round inflationary changes in wages and prices.

 

Later on in his speech he points out.

There is some evidence – for example from household surveys – to suggest that inflation expectations have moved higher.

 

But as is pointed out in the article.

But of course just like the timescale it would appear that this can be ignored too at Mr.King’s whim. We appear to have a policy framework that only exists when it is convenient which hardly raises its credibility.

 

So we have a policy criteria which whne they happen are ignored if they do not give the "right" answer, no wonder we are in a mess.

http://notayesmanseconomics.wordpress.com

Wed, 01/26/2011 - 09:52 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Josephine, here is a joke for you. Your namesake was Napoleon's wife.

So it goes...

What did Josephine say to Napoleon when he left for the battle of Waterloo?

..

..

..

..

Don't get blown apart, Bonaparte!

;-)

OT, the speech is called Jawboning. Talk talk. Watch what they do, not what they say.

ORI

http://aadivaahan.wordpress.com/2010/11/12/wisdom-for-warriors-3/

Sun, 01/30/2011 - 06:08 | Link to Comment EconSammie
EconSammie's picture

I think the article you quote from is correct Josephine. Governor King keeps trying to re-write history as what he says now is not what he said at the time.

Wed, 01/26/2011 - 09:52 | Link to Comment ATG
ATG's picture

Coming soon to a banana republic near you

Thot we were in an apple republic

Wed, 01/26/2011 - 10:08 | Link to Comment PY-129-20
Wed, 01/26/2011 - 10:10 | Link to Comment Bubbles...bubbl...
Bubbles...bubbles everywhere's picture

It doesn't mean anything. Since when have our puppet governments influenced anything at home? Maybe we will get more nannys and show hosts moving across the pond. Oh, and also look for an increase in financial scams, kind of like Nigerian scams but a little more elaborate and with a funny accent.

Wed, 01/26/2011 - 12:32 | Link to Comment GFORCE
GFORCE's picture

Ahh, "deleterious". The new buzz word lifted from Greenspan to lace turgid essays with pomp and self-aggrandizing bullsh*t. 

Wed, 01/26/2011 - 13:17 | Link to Comment stoneman sacked
stoneman sacked's picture

OMG!! UK has billions of dollars of inflation linked bonds.

What is going to happen to them :P

Wed, 01/26/2011 - 13:30 | Link to Comment Baldrick
Baldrick's picture

OT

Tyler, after reading this I remembered from a lifetime ago that while living in the eu we used to rely on the cola to cover the changes in living expenses.  The survey covers everything from butter to tires, milk to rent, everything.  As I recall it had no classification, it's just a compilation of data that is collected by the embassy or dod.  So if you wanted a true and accurate rate of inflation for any country, all you have to do is look at the rate of change in cola.

Thu, 01/27/2011 - 05:49 | Link to Comment synonym
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