Home - Index - News - Krisen 1992 - EMU - Economics - Cataclysm - Wall Street Bubbles - US Dollar - Houseprices

Let me offer a hypothetical series of events which could alter the current environment
and maybe even bring back the specter of deflation.
John Mauldin, June 27 2008

The US trade deficit is roughly where it has been for four years, running in the neighborhood of 6% of GDP. Only a few years ago, less than 30% of that was for oil. Now, that has changed. Roughly 60% of our trade deficit is spent on oil, much of it sadly going to countries that are not necessarily our friends.

The US consumer has cut his spending on non-oil items by almost 40% in terms of GDP over the past few years, and the trend is clearly down every quarter.

"We appear to be entering a period of serious stagflation with sharply rising expected and actual inflation combined with large downside risks to growth and employment."
Malcolm D Knight, managing director of the Bank of International Settlements,
(Thanks to Simon Hunt for the quote.)

A quick sidebar. I am often asked what I think about the inflation numbers produced by John Williams of Shadow Government Statistics. His number, using the methodology to figure inflation that existed in the late 70s and early 80s suggest that inflation in the US is over 11%. That certainly corresponds to what many of us feel like as we see food and energy prices rise.
If you are bearish, a high inflation number makes your case easier.

Inflation for much of America is much more than the headline CPI of 4%.
If you make $40-60,000 for a family of four, the cost of food, gas, medicine, insurance, etc. is causing the inflation you personally experience to be much more than 5%.
The CPI reflects the inflation of all items, but your personal inflation rate depends on what you actually buy.
And it seems like a lot of the necessities are running well north of 4% inflation.

M2 and other measures of money supply have skyrocketed. What gives?
Two things. One is the extraordinary growth in credit offered by banks around the world. We saw a true inflation in financial assets of all types.
Secondly, and this is less intuitive, the US consumer has been a large supplier of money to the world by running a massive trade deficit. We have seen trillions of dollars flow into the world markets which has to find a home.
Those dollars have been part of the growth in the supply of dollars around the world.

Full text