'Super Stagflation' End Game?
By Staff News & Analysis - January 24, 2011

Britain in battle over stagflation … New figures set to confirm that growth has slowed, while unemployment and oil prices rise – a severe problem that blighted the 1970s. Fears are growing that the UK is running the risk of a period of painful "stagflation", as official figures should this week show that growth continued to slow down in the final three months of 2010. Analysts think the economy is already showing symptoms of stagflation – the toxic cocktail of stagnating growth and rising prices that leaves policymakers unable to tackle one problem without making the other worse. Households suffer, as the weak labour market means wages do not keep pace with wider price rises in the economy. The UK experienced a severe bout of stagflation in the 1970s, when the oil price shock contributed to larger contractions in output and a surge in inflation. Similar forces are at work in the UK economy now, analysts say, pointing to the persistently above target inflation despite the slowing pace of growth. – UK Telegraph

Dominant Social Theme: Where did that come from?

Free-Market Analysis: Another facile media explanation. (See excerpt above.) The Telegraph gets it half right. Stagflation is not caused by "higher oil prices" but by monetary policy. The West is about to embark on an episode of what we will call – for lack of a better term – "Super Stagflation." The 1970s saw stagflation, but this likely will be so much worse. In this article we will examine why.

In the 1970s, central banks printed too much money, especially in the United States, to try to stimulate the economy. This Keynesian nostrum didn't work then and it won't work now. The "oil shock" of the time had little or nothing to do with the larger reality of stagflation. Combine faulty monetary policy with a distorted, manipulated, sluggish economy and that is what occurs. And it's happening again. Only the 2000s are the 1970s on steroids. The financial ruin is far more complete.

The 1970s began with a recession and then a stock slump. The economy recovered somewhat and stocks went up; then inflation began to bite. House prices soared and so did the price of commodities and food. It wasn't until "Tall" Paul Volcker strode to the rescue as Federal Reserve Chairman late in the 1970s, that the economy began to respond to the guidance of the central bank.

But it took a stiff dose. Volcker had to raise short-term rates to nearly 20 percent and in the process he paralyzed the banking industry and almost caused a depression. By 1982, the economy had finally started to recover. BusinessWeek asked famously if the stock market was dead – and on cue the market roared to life. The great bull market surge of the 1980s was off and running; run it would until the 1987 Crash.

The 2000s are a good deal like the 1970s as we have often observed; but it has long been our opinion that the decade-long reaction against the excesses of central-bank money distortion would run far longer in the 2000s than in the 1970s. We don't expect the bull market in commodities to run out of steam for another four or five years. And in the meantime, it seems likely that the dollar-reserve system itself may not survive.

Everything has been elongated in the 2000s. It took until 2008 for the economy to entirely unravel and the unraveling was a good deal more emphatic than in the 1970s. Predictably, the West's central banks stepped into the breach and printed literally trillions of paper dollars-from-nothing. And even though Ben Bernanke and other top central bankers maintained that they could "sterilize" these vast amounts of currency, reality will prove different. Just wait.

For more than two years, currency has been trapped in banks' coffers, but now apparently it is beginning to circulate. The velocity of money is picking up – and price-inflation along with it. This is perfectly predictable and tracks a similar trend in the 1970s. Monetary policy repeats itself as does the cycle of business inefficiency and slumping consumer demand. Here's another article excerpt from the Telegraph on the difficulties of the British economy:

Retailers suffer worst December on record British retail sales suffered their worst December on record as retailers battled with Arctic weather conditions and shoppers shunned higher prices … The biggest drop within overall retail sales volumes came from food, which declined 0.9pc month-on-month, the ONS said. Retail sales volumes declined 0.8pc month-on-month – the lowest reading since records began in 1988, the Office for National Statistics. Food stores saw a 3.4pc drop in year-on-year sales volumes – another record plunge – as prices soared 5pc. Today's official figures offer a definitive view on the impact the adverse weather and economic climate had on Christmas sales, as varied trading reports from retailers such as Marks & Spencer.

The reason for declining sales in our view is not the weather but the totally predictable unemployment rate in Britain.

According to a BBC report on January 19th, UK unemployment rose by 49,000 to almost 2.5 million in the three months to the end of November. The "Beeb" summed it up this way: "One in five 16 to 24-year-olds are now out of work, after a rise of 32,000 to 951,000 without jobs, the highest figure since records began in 1992. The UK unemployment rate is 7.9%, but for 16 to 24-year-olds it is 20.3%. Prime Minister David Cameron said any rise in unemployment was a ‘huge concern'."

Government figures always lie. The US unemployment figures are regularly put at 10 percent, but non-government watchdogs put the figure closer to 20 percent. (We believe it to be even higher.) And we think the same numbers apply to Britain. Unemployment is high because Western economies are still distorted. Instead of allowing bankrupt corporations and banks to collapse, Western central banks printed trillions in money-from-nothing and provided these funds as needed – not just in the United States but throughout the West and elsewhere besides.

The money-from-nothing effectively salvaged bankrupt multinationals and financial firms, but the result was a prolonged period where lending was confused. No one knew what companies were solvent and promising and what entities were essentially insolvent. Thus it was that people did not do business and the velocity of money slowed considerably. Now, thanks to enormous and persistent monetary stimulation, stock markets have risen and money is moving faster.

And that leads to price inflation. As the trillions that have been printed start to circulate, prices will begin to rise. Money is cheap and thus it takes more currency to purchase an individual good or service. Price inflation is a direct result of the misguided policies being followed by central bankers determined to prop up the West's economic system.

Central bankers will raise rates, of course, but the sums involved are insurmountable – somewhere between US$20 and 50 TRILLION. These funds will circulate no matter what; rates might have to go to 50 percent or 75 percent to slow the velocity and drain enough currency from the system. Western societies cannot survive 50 percent short-term interest rates. They will freeze, wither and die. The banks, too.

Central bankers are not stupid. The Anglo-American power elite – a handful of impossibly wealthy families and other interests – that has set up the worldwide central banking system is not stupid either. The cycle of the 2000s is the same as the 1970s, and thus the Anglosphere must be expecting the onslaught of price inflation, which has already caused food riots in Africa.

Stagflation this time around is not going to be an inconvenience but probably an economic killer. The choice may be between something near hyperinflation or impossibly high interest rates and a concomitant depression that will make the current economic dysfunction look preferable. The elite no doubt expects this; the dollar-reserve currency died in 2008 and current Western efforts at keeping the current system afloat are likely death spasms.

Earlier this month, US Treasury Secretary Timothy Geithner sent a letter to Congress explaining that if Treasury did not have Congressional approval to raise its borrowing authority, Treasury and the US would default. America's financial system – and the world's – is continually perched on a precipice.

The powers-that-be apparently hope they will be able to maneuver this fragility into the creation of an IMF-led bancor or something similar. They are counting on the chaos of stagflation – call it Super Stagflation – to generate the demand necessary to make the change. The idea is that when people are desperate for food and work, they will support any plan of action that promises them a more viable lifestyle.

Our point has always been these plans were made, however generally, before the Internet era. Too many people now know and understand the monetary manipulations of the elite. While Super Stagflation will no doubt afflict the West's and the world's economies, whether the elite can transform crisis into "opportunity" and then into a global currency is questionable indeed.

Suggestions from elite spokespeople are already being circulated by the mainstream media. The IMF floats the idea of a bancor; Alan Greenspan speaks of a gold standard. But the truth-telling of the Internet may already have rendered such suggestions moot. It is perfectly possible that people will be resistant to elite suggestions this time around. It is possible that a second Bretton Woods is simply not going to be acceptable to a mass of people radicalized by austerity and educated about money by the Internet.

After Thoughts

In such a situation, it could be – as we have suggested – that the system itself simply breaks down and gold and silver begin to be used spontaneously. The world, or at least the West, begins to function with private money and free-banking. The precedents are there. As we have reported previously, only in the past 100 years has the elite managed to supplant the elegant private money system of the West with a mercantilist (quasi-public) one. But the mercantilism of the past century may now be overwhelmed by the market itself. Super Stagflation may mark the beginning of the end.

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