Stagflation, here we come

It’s that 70’s show again. Afghanistan and Iran aren’t far from our minds as the country swerves left.

Looking through my economic dashboards, I saw an alarming sign: a plunge by the real (inflation-adjusted) 10-year Treasury yield to its lowest level (-2.51%) since July, 1980. Indeed, the level is lower than it was during the Great Recession.

The 10-year Treasury note still yields a positive nominal rate of interest – just not enough to keep up with inflation. As the graph indicates, this type of pattern occurs going into a serious recession (the shaded bars). In fact, you can see just after the Great Recession another hidden recession during 2011-12, which was not formally announced by the government. (I wonder why…)

In the graph above, and the one at the end of this post, I use the standard definition of inflation. Not everyone is convinced that this captures the full effect of inflation. I am developing an alternative measure I call the Essentials CPI, shown in red next to the blue standard CPI below.

The two versions are fairly close, although the red curve runs slightly above the blue curve. On average, over the long haul, the Essentials CPI is about half a percentage point more per year than standard CPI. The Essentials CPI focuses on only four categories: housing; food and beverages; medical care; and energy. Moreover, it gives slightly more weight to whichever component is running the highest that month, because these essentials are not fungible. That is, you cannot forego part of your dwelling place to buy more food, or vice-versa.

For the record, the standard CPI in April 2021 showed a 4.15% increase year-over-year; for the essentials CPI, the change was a larger 4.94%. If you wanted any evidence that inflation is more than the government tells you, this is it.

Speaking of the 1970s, do you remember the misery index – inflation plus unemployment? My own version uses double the unemployment rate as a proxy for the U6 underemployment rate, but subtracts out the yield on the 1-year Treasury note.

The Obama misery index peaks (by my definition) exceed even what we had in the 1970s. This record was beaten by the self-inflicted economic shutdown of 2020. After President Trump got us down during 2019 to the lowest level since 2006, his late 2020 comeback was the fastest in American economic history. Sadly, under Biden’s leadership, this misery index is ticking ominously higher.

The Federal Reserve board seems to be sending signals that they are slowly becoming aware that the money printing party cannot go on forever. At the same time, Biden is pressuring the rest of the world to raise corporate tax rates so as not to undercut the much higher rates he desires in America. Inflation plus stagnation equals stagflation.

The economic model I am working on for the price of gold suggests that gold is likely to appreciate substantially over the next few years. I am not certified to give investment advice. I am just telling you that data strongly supports gold as an investment for at least the next few years.

The 1970s were followed by the presidency of Ronald Reagan. Another Ronald is in the governor’s house in Florida, ready to continue serving his country. May God shelter him.

3 thoughts on “Stagflation, here we come

  1. Surak, I’m sorry not to be on-topic with you, but I just wanted to tell you something that all Americans should be angered and ashamed of. That is, US embassies, around the world, are now flying the BLM flag beneath the US flag.

    Like NBoC, above, I will have to “chew on the numbers” you gave in the article, above, before I can make a reasoned comment!

    Liked by 1 person

  2. Astute analysis. The rapid onset of stagflation in our current case will be staggering. If i wagered a guess it could be confidence loss in crypto, but the rapid materials cost escalation partnered with a massive attempt at infrastructure spending will spike inflation. I’m heeding the warning and phasing out of market positions.

    Like

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