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ChrisGraley (29.81)

That 70's show...

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August 10, 2009 – Comments (3)

I'm going to try to condense my normal long rant to a quite a few talking points. I believe that we are already starting to see stagflation and the worst is yet to come.

First a definition of stagflation...

link

What Does Stagflation Mean?
A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.

Investopedia explains Stagflation
Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.

 

High unemployment? check

Slow growth? check

A rise in commoditie prices? check

Does the market seem to be trading sideways? check

Do we have unproductive money in the economy? check.

The only thing that we seem to be missing is a catalyst!

The catalyst in the 70's was the oil crisis.

I think we might see the same catalyst again and here's why...

First, oil has lagged other commodities because almost all of the positive earning reports are due more to decreased costs or accounting tricks (financials) than to an increase in revenues. Any signal in economic turn-around should drive up commodities, but oil is more consumer driven. Most oil is burned by people going to work and since we still aren't working, that is not happening yet.

Now if you're thinking that we should be safe as long as oil prices are kept low, the OPEC countries are thinking differently.

The OPEC countries are hurting more than any of us right now and they are starting to run out of reserves. Oil, although it's increased recently is still trading below the $80 a barrel mark that most countries base their economies on. Yes it traded above $140 a barrel about a year ago, but since then has traded $30 to $40 for quite a while. How do the OPEC countries get out of this mess?

The same way that they did in the 70's, by charging us massive amounts for oil.

I'm not saying it will happen, but if I were an OPEC czar, it would be what I would do.

Even if it doesn't happen, jobs will not be created without even more being pumped into the economy. This time it has to go directly to the consumer. Given the inflationary response to bogus economic news, how do you think we respond to real economic news?

I think our government made a terrible mistake. I think that some controlled deflation would have been a good thing for this country. It would have made recovery that much easier. Instead, we decided to inflate the bubble yet again.

Bubbles (even bubbles kept inside glass cases)  have to pop. Our avoidance of popping this one just makes us add more money to the economy, inflate the bubble even more, and suffer a bigger pop later.

 

 

God help us all,

 

Chris

 

3 Comments – Post Your Own

#1) On August 10, 2009 at 11:47 PM, uclayoda87 (29.45) wrote:

Passage of a Cap & Trade bill or an ill conceived health care bill could also trigger a further de-stabilization of the economy and the resultant stagflation that you describe.

Since we will find out what Congress does with these two bills in Sept/Oct, we may not have to wait too long to see if your predictions comes true.

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#2) On August 11, 2009 at 7:59 AM, kaskoosek (37.62) wrote:

Chris

 

Break even for OPEC countries is 50$. It is also effected by output, more cuts means the breakeven is higher.

 

However most OPEC countries are currently targeting a price of 70$. If prices exceed 90$, these countries will increase output by reversing the previous cuts.

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#3) On August 11, 2009 at 11:13 AM, kaskoosek (37.62) wrote:

Just look at the price of natural gas for a cue.

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