Is Stagflation Here
The Federal Reserve has telegraphed it wants to rein in its continuing massive asset purchases. It may begin in 2022 or perhaps as early as November 2021. Note that doesn’t mean unwinding the $8.5 trillion of money it has pumped into the economy. This $8.5 trillion propped up and inflated asset prices of everything over the past decade. The list includes stocks, bonds, housing, real estate, bitcoin/crypto, art/collectibles, and others. No similar government intervention in history compares. Inflation measures now scream 40 year highs. And on October 8, the employment report showed the smallest job gains yet in 2021. Two huge misses in a row for employment. Is stagflation here already?
Stagflation represented the 1970s misery index. That period combined low to no employment growth, low wage growth, and record high inflation into a stagnant economy. This primarily resulted from the 1970’s energy price shocks, high government spending, and poor to backwards government policies. Oil and energy prices lead today’s price inflation at more than 25% over last year. And the other two pillars of excess government spending and backwards government policies have been revived. The federal government nearly shut down, and and has discouraged, fossil fuel investment and transportation. It also has encouraged “green” energy spending. Green energy projects have been doubling or tripling electricity prices around the world. As they say, history doesn’t repeat itself, but it rhymes.
Federal Reserve Conundrum
The Federal Reserve would like to start slowing its asset purchases. But the rest of the federal government (Congress and the Administration) aren’t cooperating. Someone needs to buy all the debt being spewed out of the federal government. To date, the Federal Reserve played a large role in that. For long term stability to avoid stagflation, the government needs to abandon the massive spending and asset purchases. But we don’t see that happening over the next year. The Federal Reserve likely will be stymied more than it prefers in its policy goals.
As a result, we continue to see a high probability of inflation moving up over 10% sometime in 2022. The question then becomes, who will blink and take the hard medicine that then has to follow? An earlier move would lessen the impact. However, there appears to be no appetite in Washington for avoiding the stagflation outcome. The political class is repeating the fantasy that all you need is more government spending. Reality will intrude before long. Be careful on how much you borrow to buy overpriced assets and houses.
Federal Reserve December 2021 Update
Months and months ago we warned about inflation and failure by the Federal Reserve to follow its own mandates required by law. It saw inflation as “transitory” in order to play politics. In new remarks, Federal Reserve Chairman Powell finally said what we, and others, have said for months. The Fed policies are creating disasters.
Chair Powell’s responses to question about inflation suggest that price increases are lasting longer and becoming broader. He didn’t directly say that the pace of reductions in asset purchases would speed up, or that interest rates would rise sooner than than previously expected. But the inference is that inflation is such that the next FOMC meeting could see another decrease to the monthly size of asset buys to finish the program sooner, and that the FOMC’s forecasts in the summary of economic projections could pull the timing of rate hikes forward.
Powell did say that “The threat of persistently higher inflation has grown.” He later said, “The economy is very strong,” and that asset purchases might be, “wrapping up, perhaps, a few months sooner.”
In speaking of inflation, Powell said it might be time to “retire transitory” as how the Fed describes the forces currently affecting price increases.
Job Growth
Job growth continues to perplex many. Reportedly, a job goes begging and unfilled for every individual unemployed. That 1 to 1 ratio changed substantially from a 1 to 4 ratio not long ago (4 job seekers for every open job). Much of the unfilled job problem results from unrealistic hiring goals. Companies claim to want motivated, high energy applicants looking to change employers. But then the companies also expect the applicant to want to do the exact same job as at the prior company for little extra reward. Or, the requirements pose such a hurdle that few, if anyone, can fill them. HR departments implemented automated screening programs which take away any required thinking. In essence, companies (with some tech exceptions) cause their own problems. Poor training and authoritarian culture indoctrination is turning off many applicants or causing others to depart.
This job cycle isn’t new. But it does highlight the Federal Reserve’s conundrum on pulling stimulus and funding government overspending. The economy needs private sector job and wage growth to pull out of stagflation. Current proposals in Congress seek to nuke that prospect with the $3.5 trillion spending monstrosity. That proposal would take over more control of every aspect of employment. Fearing increased regulatory authoritarianism from government agencies, private companies will be loathe to subject themselves to ever increasing employment burdens. Job outsourcing and temporary/contract work for short durations will rule the day for the next few years (Uber anyone?). Government jobs won’t be affected. They offer lifetime employment, superior health plans, generous 401(k) matches, generous pensions and little to no performance requirements.
Borrowers face a higher rate of potential layoffs or gaps in employment. Don’t over commit on a mortgage. Prepare by buying, reading and implementing strategies in Winning Mortgage, Winning Home.
Effects of Stagflation
Yes, stagflation affects a great many things. Some things pop out as blindingly obvious. Others lurk insidiously in the background. For a more thorough analysis of the last round of stagflation and its effects, check out PeerFinance101.