Cost of This Time Down: Stagflation

[Parsad]

Bill Fleckenstein discusses a topic we touched on last year...the likelihood of stagflation rearing its head this time.  It was my guess from the beginning and I think it will be what we face for the next few years.  Cheers!

 

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/cost-of-this-time-down-stagflation.aspx

[Estimated Profit]

There will likely be many things hit by inflation while we have a stagnant economy.

 

Anything in demand in developing nations will be hit by it. Materials, Oil (not necessarily natgas), Food, perhaps very talented skilled individuals (brain drain from West to East so to speak), luxury goods... Eastern demand = lower Western supply.

 

Anything not in demand will disinflate: labour, discretionary products and services,  products and servcies which compete based solely on price: e.g. rates for telephones, internet, contractors, mechanics, will all contract. As spending is reduced supply will increase as demand decreases.

 

It looks like there is a big reversion to the mean when it comes to standards of living from West to East, ours flattening out while theirs improves. 

[Munger]

I agree with Prem's positioning.  The math shows that deflation is almost certain, at least over the next 3-5 years.

[scorpioncapital]

nothing about the future is certain

[rick_v]

The term liquidity trap is used in Keynesian economics to refer to a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply.

 

In its original conception, a liquidity trap resulted when demand for money becomes infinitely elastic (i.e. where the demand curve for money is horizontal) so that further injections of money into the economy will not serve to further lower interest rates. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate.

 

 

[twacowfca]

Thanks, rick_v for a clear explanation of liquidity trap.  This part of Keynesian theory is spot on.