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For David Rosenberg The Legacy Of The Bernanke Regime Will Be Stagflation

Tyler Durden's picture


Several months ago we presented a dramatic change in David Rosenberg's outlook when from a die hard deflationist, he uttered the first rumblings of an inflationista. Since then he has further focused his substantial shift in perception culminating with this: "The number of firings, in fact, are more than 10% lower today with a 7.5% unemployment rate than they were in May 2007 when the unemployment rate had hit its cycle trough of 4.4%. Right there that tells you that 7.5% is the "new 4.4%". Yikes. Sounds very 1970s-ish — and recall in that decade, real spending growth was weak but the supply curve was so sclerotic that inflation stayed stubbornly high. At the same time, at a time when firings are at record lows and job openings are rising at a double-digit annual rate, the number of people quitting their current job for greener pastures elsewhere is on a discernible uptrend. All this points to higher wage growth ahead, and frankly, this is a good thing for society." Of course, Rosie is simply picking up on what we discussed over a year ago: namely that courtesy of central planning, Okun's law is now terminally broken.

It also means that higher wages for those workers who are in demand (and perpetual part-time status for those who aren't) will lead to another unpleasant side effect for those forecasting soaring EPS for the S&P: a further drop in corporate margins, which as we keep on showing are now the lowest they have been in over two years: "But the flip side is that as the labour share of the national income pie mean reverts off its all-time lows, we are likely to see profit margins pinched. This is the big risk: margin compression affects the 'E', while inflation, insofar as the tight historical relationship with final prices holds, even if to a smaller degree this time around, affects the P/E."

Some claim to see this in the chart of the Labor Share of income, which to the delight of Marxists everywhere, may have finally broken its long term downtrend and found a support level:

But wrapping it all together, there is one word for what follows: stagflation.

The next major theme is stagflation — this will be the legacy of the Bernanke regime. You cannot keep real short-term rates negative for this long in the face of even modestly positive real economic growth without generating financial excesses today and inflationary pressures in the future. Imagine dusting off the Phillips Curve and getting away with it — it's as if the Fed has changed religions as it now believes there is some trade-off between inflation and unemployment The last time we had negative real policy rates for this long with a central bank wedded to the Phillips Curve was under the Burns-led Fed of the early 1970s. As I have said recently — I am undergoing my own epiphany. I am renowned for being very early — to a fault — in my calls and no doubt am early yet again.

Little by little all the deflationists are starting to fold.


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Mon, 06/03/2013 - 08:24 | 3619835 nasdaq99
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Berdonkey is drinking Gen X's milkshake.  Drinking it all up!

Mon, 06/03/2013 - 08:31 | 3619839 GetZeeGold
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Pretty sure we're into Gen X's grandkids actually.


There was the greatest generation.....we're kinda the opposite of that.

Mon, 06/03/2013 - 09:09 | 3619866 Pinto Currency
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Rosenberg's subtext - "I am brilliant."

What he discusses was visible a decade ago.  This is simply a 1970s redux,

Printing money after a bubble crash cripples the capital structure of an economy by artificially extending the time preference.  It also creates inflation.  Stagflation.

Mon, 06/03/2013 - 12:08 | 3620406 Totentänzerlied
Totentänzerlied's picture

No, shale oil will not save you, like those miraculous conventional wells did in the 70s.

Mon, 06/03/2013 - 13:00 | 3620602 Jack Napier
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Funny, I thought deflationary pressure was the result of markets seeking equilibrium after being artificially inflated. Yet somehow inflation is on the horizon? Maybe... if the big 5 are willing to let that money into circulation and the Fed is willing to keep firing after the clip is empty.

Mon, 06/03/2013 - 14:15 | 3620833 Pinto Currency
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Prices can also rise when many (like ZHers) lose faith in the c.b.'s omnicience.

Nothing special about their paper.

Mon, 06/03/2013 - 12:10 | 3620414 WhiteNight123129
WhiteNight123129's picture

Solar is bad thing to bet against, but it might not be enough though.


Mon, 06/03/2013 - 20:47 | 3622077 WhiteNight123129
WhiteNight123129's picture

Hey Pinto, ok extending the time preference artificially, we all get that, we have a fake long duration trade.

But how specifically does the extension of time preference cripples the capital structure specifically. It is not a rethorical question, I have not figured out why and I am interested in your arguments. 

I say a shifting of long bond duratios it cripples financial assets in teh long run, but how does it cripple the capital structure specifically?. It is a form of death for both equity and bonds, but more for bonds actually. 

What i would agree with is that a negative duration environment makes people refuse to plan for the future but favor present goods over a promise of future cash flows. It is not good, because it discourages those who project themselves in teh future.


Mon, 06/03/2013 - 08:57 | 3619902 SamAdams
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The greatest generation sure didn't have the greatest knowledge about money creation. 

Anyhow, why so pessimistic about our children's future?  The Chinese will be sending all their mfg over here, and jobs will abound, housing be provided, and bouncy nets placed along all roof-tops.  They are already exchanging all of those rapidly inflating dollars for safer US property and real assets.  Good thing FED sold its gold to their banks, we want the Yuan to be the new reserve if we are ever to see manufacturing and agricultural labor (other than ethanol) return to the states.  Of course, we still have to eliminate this US middle class; a very successful agenda as of late.  It is also impressive how so many kids come back from war disabled by some means or another.  Have to get that government dependency to greater than 50%, and we are almost there!  Will be quite the celebration when taxes must be raised and the midddle class further decimated.  Our Fascist-Communist Amerika is almost a reality!!!   

Mon, 06/03/2013 - 12:14 | 3620433 Totentänzerlied
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It's actually the Greatest Fool Generation, as it spent its whole existence laying the foundation for the destruction of America... And then demanded praise for its dubious acheivement. Mission fuckin accomplished. I love to harp on the useless egomaniacal Quisling generation, the Baby Boomers, but I never said they started this shit.

Mon, 06/03/2013 - 23:48 | 3622610 Diogenes
Diogenes's picture

At least the Boomers had some political balls. They were marching in the streets and scaring the shit out of Nixon and he didn't pull half the shit Bush and Obama did. Where are today's protesters? Can you see those lame ass Tea Party and Occupy goofs scaring anybody?

Mon, 06/03/2013 - 09:09 | 3619921 krispkritter
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Went straight into 'Gen Why?'  And now 'Gen Zzzzzz...'

Personally I'd like us to be 'Gen F U' and starting breaking TPTB's shit down...Looks like the party is in Turkey though:

Mon, 06/03/2013 - 08:25 | 3619836 Debugas
Debugas's picture

who said there will be "positive real economic growth" anytime soon ? Ain't gonna happen

Mon, 06/03/2013 - 08:48 | 3619884 WestVillageIdiot
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I just want to see what happens if the Yen breaks decisively below 100.  That should be some fun. 

Mon, 06/03/2013 - 08:59 | 3619909 SamAdams
SamAdams's picture


Mon, 06/03/2013 - 08:27 | 3619837 Yen Cross
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  Silver is ripping higher. Me likey

Mon, 06/03/2013 - 08:43 | 3619865 WestVillageIdiot
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Did somebody in Greenwich over sleep today?  They are supposed to clobber AG promptly at 8:30.  That guy better get his butt to work or he is fired. 

Mon, 06/03/2013 - 08:52 | 3619891 Yen Cross
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 lol.  I needed some light hearted humor.

Mon, 06/03/2013 - 09:30 | 3619966 sleepyguy007
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he must have hit snooze a few times,  looks liek 9am did it.

Mon, 06/03/2013 - 08:30 | 3619841 fonzannoon
fonzannoon's picture

inflation is coming and it has nothing to do with greener fucking pastures.

it's just a tapdance on the grave of the middle class.

Mon, 06/03/2013 - 08:50 | 3619888 fuckitall
fuckitall's picture

Inflation is here now, 10% - 13% / yr.  Some say 15%.

Mon, 06/03/2013 - 08:52 | 3619892 fonzannoon
fonzannoon's picture

agreed, even I get suckered into the "It's coming" meme sometimes. Thanks for the reminder.

Mon, 06/03/2013 - 10:09 | 3620050 BeerBrewer09
BeerBrewer09's picture

FOUR (4) fucking duracell or energizer 9 volt batteries at Lowe's = $11.79. This is one product where I don't believe they can decrease quality/packaging size to fudge the rapid increase in price. I'd love to see how much those same batteries were 5 or 10 years ago.

Mon, 06/03/2013 - 11:29 | 3620290 HardAssets
HardAssets's picture

Yeah, I bought three greeting cards for h.s. grads last week. Ran over $15 . . .

A relative is reading a paperback book she checked out from the library that has the price printed on the cover. I looked up the current price and it has doubled since 2005.  Do this comparison with many items youve bought iin the past and you can see how bad inflation really is.  Of course the further back you go the worse it gets. Over 80% of the value of your money has been iinflated away (stolen) since 1971. And that's using government liar stats.

IMO much of what the fascist big govt/big banks partnership does is to hide this fundamental theft of the earnings and wealth of the people. (And notice how there is Never a really indepth examination of the history and nature of banking & the Fed Reserve on the mainstream media ?)   How much better off would Americans have been if they and family's wealth over generations hadn't been taken from them ?  Do you think you might just have had a little more resources to take care of your own retirement, your own health care, and your kids educations ?

The cost isnt just in money. It impacts every aspect of our lives. Many young mothers would like to be with their children the first few years. But they must work because one paycheck earner can't support most families. And many good middle class jobs have been outsourced in the name of 'free trade' gobalism. Many young men end up fighting wars overseas because they have few prospects back at home.  It is a truly evil system.

Mon, 06/03/2013 - 12:52 | 3620587 Go Tribe
Go Tribe's picture

Yeah, I bought three greeting cards for h.s. grads last week. Ran over $15 . . .


You could've gotten them into a house with a zero-down VA loan for less than that!

(I read that 96% of their loans are now zero down)

Mon, 06/03/2013 - 12:17 | 3620449 Totentänzerlied
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10% per year for 10 years is not PSYCHOLOGICALLY equivalent to 100% in 1 year. You are therefore correct to say it's coming, as the last 100 years, 30s excluded, were just a slow prelude.

Mon, 06/03/2013 - 09:49 | 3619998 yogibear
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No worry, Bernanke, Evans, Dudley and Yellen will just deny inflation and point to the cooked CPI.

Wed, 06/05/2013 - 09:43 | 3626030 e-recep
e-recep's picture

i monitor meat prices, i mean good quality meat, not Orly's chicken. the inflation seems to me 12.5% at the moment.

Mon, 06/03/2013 - 08:30 | 3619842 dow2000
dow2000's picture

Rosie has gotten it right since 2006

Mon, 06/03/2013 - 08:31 | 3619844 Jason T
Jason T's picture

Inflation: Making Sure "It" Doesn't Happen Here

You can't stop nature bitchez

Mon, 06/03/2013 - 08:31 | 3619845 imapopulistnow
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A legacy of stagflation may not be so bad if the alternative was servere deflation coupled with a second great depression.

Mon, 06/03/2013 - 08:35 | 3619854 imapopulistnow
imapopulistnow's picture

Wage-driven inflation as opposed to low-wage driven deflation is the better of the two alternatives.

Mon, 06/03/2013 - 08:43 | 3619863 imapopulistnow
imapopulistnow's picture

And 7.5% may very well  be the new 4%.  The Governor of Pennsylvania was spot on when he said that many of the unemployed are drug addicts who can not hold a job.  Thank you Purdue Pharma et al.  You contributions to the legacy of stagflation likely is far greater than Bernanke's.

Mon, 06/03/2013 - 09:22 | 3619951 Pinto Currency
Pinto Currency's picture


The 'being shot is good when the alternative is to be electrocuted' analysis doesn't work.

Central banking doesn't work.


Mon, 06/03/2013 - 10:56 | 3620199 Creepy Lurker
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I logged in specifically to give you a green arrow for that statement. Its time to stop making excuses and rationalizations for these bastards. They are destroying us.

Mon, 06/03/2013 - 11:33 | 3620333 HardAssets
HardAssets's picture

"Central banking doesn't work."

On the contrary, is works Very Well for the small group of criminals that benefit off it.

Mon, 06/03/2013 - 08:38 | 3619858 NoDebt
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If you are young you will live to regret saying that.

This economy is now a Windows laptop with no "restart" function.  Things breaking down and mysteriously not working any more.  Icons disappear from the screen, the internet connection getting slower, but no way to turn it off and on again for a refresh.

They are printing now for only one reason- to pay for government spending, which is currently 25% of our economy and will become 35-40% of our economy in a generation.  We are becoming Europe.

Mon, 06/03/2013 - 10:13 | 3620055 Non Passaran
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WfW 3.11

Mon, 06/03/2013 - 08:32 | 3619846 blindman
blindman's picture

it wasn't the ....
was the low spark of high heeled boys.

Mon, 06/03/2013 - 10:59 | 3620215 Creepy Lurker
Mon, 06/03/2013 - 08:33 | 3619852 Zen Bernanke
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Since greenspans time about 18 years ago, the fed has caused at least 7 bubbles in 4 different markets, 5 of which popped to disasterous consequences.  With this legacy of being responsible for what is likely the worst price stability in recorded history, it is a testimony to the strength of business to have succeeded at all given this backdrop. 

Mon, 06/03/2013 - 08:47 | 3619878 WestVillageIdiot
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But the body can only fight off multiple parasites for so long. 

One of the headlines today is about how Bernanke should stay on as Fed Chair.  The piece (of crap) was written by some clown from Reuters.  He drools on Bernanke's balls, giving him the usual hero treatment.  Just like Greenspan, Beranke will be a hero until he isn't.  Then he will go work for some scoundrels like DB or JPM. 

Give 'em hell, Ben, you bearded little douche bag.

Mon, 06/03/2013 - 08:35 | 3619853 RSloane
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But but....I've been told that our economy is in a state of evolution, from industrial and manufacturing to services. The real question gripping everyone is - should McDonald workers be counted as a part of the manufacturing or services industries?  Bernanke is cleverly inducing stagflation while this evolutionary process is unfolding much like a coma is induced to enhance the recovery of brain-injured patients. Thanks Ben Shalom, where would we be without you.

Mon, 06/03/2013 - 08:38 | 3619855 IamtheREALmario
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As I recall, it took the manufacturing led PC Boom of the early 80s to get us out of stagflation. Yes, capital was required to expand manufacturing capability. However, MORON economists (at least pretend to) forget the link between value adding activity and the increase in capital. Today's Fed "created out of thin air" money goes only one direction OUT OF THE FRIGGIN COUNTRY. It does not support (and that all it ever does in a healthy economy) the value adding activity. My belief is that is by design, since those who run our world have been very poor in the admimistration of their duties and now are running a massive "no child left behind/affirmative action" program with the whole planet and that, like all of these progressive/communist programs, many will have to suffer to prove that the central planners are wrong and incompetent.

The other arugument is that the central planners are not incompetent, simply that our assumptions are incorrect about what exactly they want to accomplish (slave plantation earth) and how that goal got away from them for a while.

Mon, 06/03/2013 - 08:53 | 3619895 ElvisDog
ElvisDog's picture

You're overthinking things. There is no global "affirmative action" program. Everything that has happened over the past 10-20 years (at least) can be explained by the oligarchs who run things in every country trying to stripmine as much wealth as possible from everyone else. They are sociopaths to whom accumulation of wealth trumps everything else.

Mon, 06/03/2013 - 10:42 | 3620145 nofluer
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As I recall, it took the manufacturing led PC Boom of the early 80s to get us out of stagflation.

As *I* recall it took double digit interest rates imposed by Volcker to tame stagflation. As Volcker put it, "Without a healthy currency, you cannot have a healthy economy."

The rest happened as a RESULT of Volcker's stabilization of the currency.


Mon, 06/03/2013 - 08:37 | 3619857 goldenbuddha454
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Roubini talking gold to $1,000.00 or less due to the inability of QE's to create inflation, banks hoarding cash, collapse in the velocity of money.  He may have a point.  Just means I'll be buying a bunch of gold and silver at the next bottom.  Thanks Nouriel!

Mon, 06/03/2013 - 08:50 | 3619886 sleepyguy007
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he has been more or less wrong about everything since 2008 and his dr. doom fame.   the fact he's saying it now might mean its the bottom or near it

Mon, 06/03/2013 - 08:53 | 3619887 IamtheREALmario
IamtheREALmario's picture

It might be worth looking at the gold chart centering on 1980 and how gold performed against inflation.

It WAS during stagflation that gold rose the most. However, I would argue that since the crash in 2008 we have had an extended period of stagflation in the real economy, much of which has been caused by commodity and equity price manipulation not market forces. This time the Fed decided to keep interest rates low, but not put the money into the economy. IF the money that the Fed created was staying in this country and being put to tangible use (other than buying imports and increasingprices), then the velocity of money would be huge and inflation would be getting away from us. Unfortunately or fortunately all of the money that the Fed is putting into the ecomony is getting trapped in nonproductive eddies, such as imports, equities and bankers' pockets. The banks are simulating demand by raising commodity prices (such as food and oil) and as a result making thigs less afforadable to the working classes. Otherwise, without the money making it to the economy inflation is limited because there is not  a lot of money chasing goods. How could this ever change to create demand driven inflation without re-starting value adding activity here in the U.S. to increase the velocity of money? Price controls (by the banks) are not a healthy substitute for a market driven economy. This time prices are being controlled UP by the banks and not limited by the government, but in either case it distorts things and creates malinvestment.

Mon, 06/03/2013 - 12:55 | 3620599 Go Tribe
Go Tribe's picture

No one will accept your bid in U.S. dollars.

Mon, 06/03/2013 - 08:38 | 3619859 viator
viator's picture

Good steak costs $10-20 pound in the supermarket but there is no inflation.

Mon, 06/03/2013 - 08:46 | 3619872 imapopulistnow
imapopulistnow's picture

So you shop at Whole Foods?

Mon, 06/03/2013 - 09:12 | 3619930 gmrpeabody
gmrpeabody's picture

He said "good steak"..., not old milk cows.

Mon, 06/03/2013 - 08:48 | 3619880 GetZeeGold
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You can kiss steak burritos and Angus burgers goodbye at MacDonalds.

Mon, 06/03/2013 - 09:00 | 3619911 WestVillageIdiot
WestVillageIdiot's picture

The Angus burgers will undergo a slight modification. 

Mon, 06/03/2013 - 09:13 | 3619932 gmrpeabody
gmrpeabody's picture

Like..., with no "g" in it?

Mon, 06/03/2013 - 08:54 | 3619899 Yen Cross
Yen Cross's picture

  Inflation/ Who said inflation?

  Retail Beef Prices Expected to Rise -

Mon, 06/03/2013 - 08:54 | 3619903 IamtheREALmario
IamtheREALmario's picture

Yes, but high quality pork and chicken are still very cheap.

Mon, 06/03/2013 - 09:08 | 3619923 Yen Cross
Yen Cross's picture

   Please tell me where you shop!  Pork and Chicken are ballistic in my neighborhood.

Mon, 06/03/2013 - 12:43 | 3620551 gmrpeabody
gmrpeabody's picture

Can't buy a decent chicken for less than $10-$12..., unless you don't mind the ones that have been frozen and thawed 4 or 5 times and look like they were raised in a concentration camp.

Four, five years ago I could buy a fresh chicken all day long for $4-$5

Mon, 06/03/2013 - 09:39 | 3619986 krispkritter
krispkritter's picture

I've screamed about meat inflation until I went horse...

Mon, 06/03/2013 - 09:43 | 3619992 Cobra
Cobra's picture

Put a gun in the wife's hand... We're gonna need more than 1 deer this year.

Mon, 06/03/2013 - 08:39 | 3619860 madbraz
madbraz's picture

Rosie made much more sense when he didn't have to tweak his message to suit the "risk-on" ways of his employer.  Now he sounds just like much every other economist out there.





Mon, 06/03/2013 - 08:43 | 3619867 blindman
blindman's picture

TRAFFIC The Low Spark High Heeled Boys

Mon, 06/03/2013 - 08:43 | 3619868 Sutton
Sutton's picture

That explains last week's bond action.

Mon, 06/03/2013 - 08:47 | 3619877 fuckitall
fuckitall's picture

No, Bennie's legacy will be looting the American sheeple for his banker bosses and the govt.

Amazing now many "experts" out there still don't see it.

Mon, 06/03/2013 - 08:51 | 3619890 atomic180
atomic180's picture

Volcker may have seen his inability to contain PM's and inflation as the greatest failure of his 1980 tenure... but it did stimulate the economy and promote growth and raise wages for the consumer/middle class... funny how these archaic discounted principals like the Phillips Curve can come back to haunt the Keysians... whats old is new again...

Mon, 06/03/2013 - 08:55 | 3619897 Ignorance is bliss
Ignorance is bliss's picture

I understand stagflation to be an economic situation where goods and services essential to life hyper-inflate. Such goods and services include food, gasoline, medicine, and other basic essentials. Any leftover income is hoarded to cover rising costs. As a result all other products deflate since there isn't any leftover income. Is that right? I assume we can thank our government and elite banking sector led by Bernanke for this condition.

Since the current fiscal policies such as ZIRP, war, and fraud have not changed. How does a country extricate itself from stagflation? What happens when people live through stagflation and the economy continues its polarization between the well fed and the unfortunate many? What happens to the boomers as they retire and those young people without jobs? What happens when this polarization continues for years and increasingly gets worse while more people fall victim to the hard reality of continued stagflation. They say history never repeats, but that it rhymes. What does history say will happen? 

Mon, 06/03/2013 - 09:31 | 3619969 jughead
jughead's picture

History sez:

there once was a man from nantucket
who kept all of his cash in a bucket
his daughter named nan
ran off with a man
and as for the bucket nantucket

but he followed the pair to pawtucket
the man and the girl with the bucket
he said to the man
he was welcome to nan
but as to the bucket pawtucket

the pair followed the man to manhasset
where he still held the cash as an asset
but nan and the man
stole the money and ran
and as for the bucket manhasset

Mon, 06/03/2013 - 09:41 | 3619989 pazmaker
pazmaker's picture

you must be a Wampanoag.

Mon, 06/03/2013 - 09:36 | 3619978 fuckitall
fuckitall's picture

"How does a country extricate itself from stagflation?"

High interest rates, like Fed did in late 70s. 

But forget high interest rates now, govt can't pay 15% - 20% interest on 17 trillion debt.  Even 10% would be 1.7 trillion / yr, over half the federal budget.  No way they could do it. 

It'll be ZIRP from now on.  ZIRP and printing.  US dollar is headed for the trashcan.


"What happens when people live through stagflation and the economy continues its polarization between the well fed and the unfortunate many"

Nothing, they're sheep.  Sheep never do anything, regardless how bad it gets.


"What happens to the boomers as they retire and those young people without jobs? What happens when this polarization continues for years and increasingly gets worse while more people fall victim to the hard reality of continued stagflation"

Nothing, they're sheep.  Sheep never do anything, regardless how bad it gets.


Mon, 06/03/2013 - 10:22 | 3620088 smacker
smacker's picture

Yeahbut... will continued ZIRP solve the stagflation problem? I don't think so.

Meaning that current policies are not dealing with the issues that need dealing with. Bernanke should be removed from office and replaced by someone who knows what he's doing. Bernanke's had his chance to prove his experiments work, and they've failed.

Mon, 06/03/2013 - 11:11 | 3620257 fuckitall
fuckitall's picture

Bennie knows what he's doing, looting the nation for his banker bosses (and govt bosses).

No, ZIRP and printing won't stop stagflation, just make it worse.  So what?  He never cared about the economy.

Mon, 06/03/2013 - 10:07 | 3620042 acetinker
acetinker's picture

"They will be divided, father against son and son against father, mother against daughter and daughter against mother, mother-in-law against daughter-in-law and daughter-in-law against mother-in-law."  Luke 12:53.

Disclaimer- I don't believe in talking bushes or parted seas, but I gotta believe the prediction above to be spot on.

Mon, 06/03/2013 - 09:06 | 3619919 Nukular Freedum
Nukular Freedum's picture

Neo-Keynesians argue that a deflationary liquidity trap (of persistently low interest rates and shrinking economic activity) cannot be solved by expanding the money supply because of persistently low velocity of transactions. But note that the magnitude of any trap is always proportional to the prior increase in gross debt in the economy. Debt functions rather like a black hole - negative energy, sucking in economic activity - in this situation. It can only be countered by a supply of positive energy (i.e. cash money).
 Thus, ultimately, liquidity IS the way to break the trap since it monetises this debt to the point that interest rates begin to recover - i.e. inflation simply MUST start to set in, even if for no other reason than that ongoing (and now monetised) government spending remains stratospheric - a la classical Keynesian prescription. U.S. Government spending for example has increased more than thirty five fold over the last half century (not inflation adjusted). Perhaps this largesse also has something to do with the economic malaise that has steadily set in over the exact same period?
 After the trap is broken however (as signalled by the popping of the bond bubble) much of the public and private debt overhang still remains and indeed becomes MORE onerous due to the sudden rise in interest rates (the breaking of the trap). Further monetisation however risks stagflation and hyperinflation. In this case the Fed may have to taper the monetisation process in order to temper inflation expectations, thereby sending the economy back into its debt induced swoon. 
 I believe that several cycles of this process (which ultimately undermines the value of money) may have to be experienced before the debt load (from the prior period of loose money) is fully discharged and a new super-cycle can begin. Better to have not had the loose money period or the stupendous run up in government deficits to begin with.
 Free-banking would help with this root cause of the problem, since it would curtail the tendancy to produce an oversupply of money. (Consistently balanced government budgets and the sound regulation of fraud are the other half of the long term solution btw). The oversupply of money under the current system has to be laid at the door of the government (via the central banks) and not at the door of the free-market since a free-market money supply has not existed in over a century in the U.S.. Ergo the need for free-banking, albeit free-banking is a little understood phenomenon. Something which tells its own story I believe.

 Btw, the existence or inexistence of a gold standard has nothing to do with any of this. That money supply might be tied to the gold supply under a free-banking system is purely a matter for individual banks and their customers to decide upon - it occurs organically and without the need for legislation or complex system building of the Bretton-Woods or any other variety.
 A strict and formal (government controlled) gold standard is NOT a pre-requisite of free-banking - simply because the banks are kept somewhat honest by their customers. Which is just as well because formal and monolithic gold standards always fail catastrophically. 
 So under free-banking money largely remains "as good as gold" but with less rigidity and less catastrophe than under a government fiated gold standard (so a "great-depression" type event also becomes impossible under this system). Thus there is no need of or indeed mechanism for Keynesian style interventions (of the sort Bernanke, Carney, Kuroda and the gang are currently engaging in) under this system and liquidity traps simply do not form, because the masters of money - the private banks and NOT the central banks or government - are held to account by their own customers and shareholders. Such are the benefits of a true free-market.

Mon, 06/03/2013 - 10:06 | 3620023 nofluer
nofluer's picture

It can only be countered by a supply of positive energy (i.e. cash money).

Tell it to Japan... but don't think you'll be the first. I believe Milton Friedman already told them that and they've been trying it ever since... and it does NOT work.

The ONLY thing that works is to unleash the economy - to get the government out of individual and business decision making. When a business has to look at the tax effect of any decision to decide whether it will be profitable, that's BAD! All a business should need to look at is "does doing this cost more to do than we can charge for the end product." (Taxes are a cost of doing business, but if they are punitive, as now, there will be less/no business to tax. And Obamacare is a HUGE tax!)

Ooops - forgot. If you don't let interest rates rise, no one will save. If no one saves, there is no capital to invest in business. If there is no capital for investing, there will be no taxes paid and the government will continue to run HUGE deficits, thus increasing the debt and making the problem worse.

WE HAVE TO LET THE SYSTEM RESET!!! Debt that cannot be paid must be cleared - that means HUGE defaults. IT MUST HAPPEN or you'll never have a healthy economy again. It's not really a liquidity trap. It's a perception trap and the false perception is that defaults are BAD! They are not. they are as natural as breathing to the economic cycles.


Mon, 06/03/2013 - 09:34 | 3619971 babylon15
babylon15's picture

There won't be stagflation.  Look at Japan.  20 years and counting of deflation during ZIRP and stimulus.  In fact, stagflation is impossible without high interest rates, and as soon as interest rates go up, the entire financial system collapses.


Think how different the country is today from the 1970s:

1.  110% debt to GDP ratio instead of 40%.

2.  Total credit market debt is equal to over 360% of GDP, versus 150% in 1970.

Mon, 06/03/2013 - 09:41 | 3619990 Ignorance is bliss
Ignorance is bliss's picture

I don't know what you are experiencing, but I see higher non-GMO food prices, and higher gasoline prices. As a percentage of my budget essentials seem to be increasing at a faster pace. I don't really know about non-essentials, since I am hoarding my cash for future essential purchases.  

Mon, 06/03/2013 - 10:29 | 3620112 smacker
smacker's picture

Surely, if you get higher import->consumer prices for food/energy etc due to global commodity prices and/or a currency that's been hammered to death by the central bank, you will get price inflation. If you also have no growth due to economic stagnation, then you have stagflation. No?

Mon, 06/03/2013 - 09:38 | 3619979 pazmaker
pazmaker's picture

7.5% unemployment rate?   yeah right!!!!

Disability the new unemployment compensation is set to run out of funds in 2.5 yrs!

More pressing than the potential shortfalls in Medicare or Social Security is the dwindling trust fund for the federal disability program.

The number of disability recipients has risen 23 percent just since 2007. As of January, the federal program was supporting 10.9 million people, including disabled individuals and their families.

But the program's coffers are expected to be bare by 2016, according to the Congressional Budget Office (CBO).

Read Latest Breaking News from
Urgent: Should Obamacare Be Repealed? Vote Here Now!


This is according to the CBO and you can find the same article at any news source since the CBO put it out, so if you don't like newsmax you can find Huffpost, CNN, Reuters etc all reporting this.

Mon, 06/03/2013 - 09:45 | 3619997 nofluer
nofluer's picture

I am renowned for being very early — to a fault — in my calls and no doubt am early yet again.



Seems to me you come late to the party...

Mon, 06/03/2013 - 09:49 | 3620006 wonderatitall
wonderatitall's picture

saw david pouffey on the new obama biz show on boomberg. he says not to worry every is good. all we got to do is stop these scandals and kill all republicans and independents. oh, and dont get him started on those damn traitors the libertarians.

Mon, 06/03/2013 - 09:54 | 3620014 yogibear
yogibear's picture

It's unfortunate that Krugman, Bernanke and Glen Hubbard messed up a lot of young minds with their Keynesian economics. 

Mon, 06/03/2013 - 11:00 | 3620224 Shizzmoney
Shizzmoney's picture

The only thing inflating is debt.

Mon, 06/03/2013 - 11:25 | 3620301 My Days Are Get...
My Days Are Getting Fewer's picture

Stagflation defined:


The value of everything I own goes lower.

The cost of everything I need goes higher.

That is where I am at now.

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