Stagflation: Slow Growth With High Inflation

We're seeing the slow growth story play out in many ways right now. I think it is safe to say it will be with us for a while. What started with subprime problems, then spilled over into housing in general, and now appears to be hitting our employment numbers. So much for "containment".

But what about the inflation part? Some of it will be offset by falling house prices and possible rising unemployment, but I don't think it is going to be as much as most people think (at least when it comes to the headline inflation number). The government doesn't use home prices in the CPI calculation. It uses rental prices and owner equivalent rental prices. We didn't see the rise in home prices affect the CPI much and it is my contention that a fall in home prices won't affect the CPI much either.

Food prices going up, British shoppers warned
This week, the food industry and the United Nations predicted that a combination of factors would result in higher prices for everyday staples, with potentially devastating consequences for countries around the world.

I agree. Food inflation hurts the poor most and that is truly unfortunate. Further, The "combination of factors would result in higher prices for everyday staples" part is especially disturbing. Does that mean I should start hoarding everyday staples? What if everyone else starts hoarding too?

Yesterday the head of the UN's Food and Agriculture Organisation, Jacques Diouf, said surging prices for wheat, corn and milk had the potential for social tension and, eventually, political problems. While food may be less than 10 per cent of the household budget in the developed world, in poorer countries it was 65 per cent. "If we continue to see an increase in their prices, and in their import bill for food, there is a serious potential problem," he told the Financial Times.

"Social tension" and "political problems" are the last things the Chinese government wants to see.

To battle inflation, China limits price increases
Food prices account for a third of the Chinese consumer price index. Soaring pork costs, caused by a pig shortage, have contributed to higher costs.

Their "pig shortage" sounds a lot like our "oil shortage" in the 1970s. We relied heavily on oil then. They rely heavily on pigs now. If so, then maybe somebody could explain to me why China continues to export pork?

Inflation is a "prominent problem," said Zhang Manying, a price inspection director with the commission, adding that government measures to curb price increases have had "an initial effect."

I'd argue that price controls to stop price gouging would work, but I'm not sure that's all it is. Price controls on food cannot magically generate more food any more than printing more money (or more credit) can magically create more prosperity.

China exports pork despite shortage, processors say pig disease not major factor
BEIJING: China has continued to export pork this year despite a domestic shortage that has sent prices for the country's staple meat soaring.

Commerce Ministry spokesman Wang Xinpei's report of 62,000 metric tons of pork exported in the first half of this year appeared to mark a overall decline, with pork exports for the whole of last year totaling 246,000 tons. China pork imports are usually dwarfed by its exports, but the current shortage has raised the possibility of an increase in imports.

That's a lot of pigs.

The surge has been blamed on a cyclical shortage of stocks, higher costs for feed and an outbreak of potentially deadly blue ear disease, which has killed about 40,000 pigs this year and forced authorities to destroy thousands more.

I think we can safely rule out the 40,000 pigs being much of the cause, unless each pig weighs a few hundred metric tons that is, lol.

Four Thousand Years of Price Control
For more than four thousand years, dictators, despots, and politicians of all stripes have viewed price controls as the ultimate "something for nothing" promise to the public.

The cause of the problem was also based on "something for nothing" (the printing of excess money and/or credit).

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation's productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.

I continue to feel that this is playing out somewhat like the 1970s. If so, we might get brief relief from inflation soon. There was a brutal recession from late 1973 to early 1975. However, even if we do get a recession (not a certainty) what happens next? Inflation was a serious problem following that period.

This is just an attempt to make some sense of the news. I certainly don't know what's going to happen next. I'm not sure it is possible to know. It seems to me that it will depend on what the politicians and bureaucrats decide to do if times turn tough. I assume (could be wrong) that the world's politicians will continue to embrace "something for nothing" policies (bailouts, printing money, price controls).

And lastly, one reason I'm fairly comfortable with my long-term stagflation outlook is because the investments that work best during stagflation have worked for at least three years already but few seem to care (perhaps because cheap money has created the illusion that all is well). Further, stagflation still isn't in the headlines much (do a news search for "stagflation"). When stagflation becomes as popular as housing stories, then perhaps I'll be changing my tune.