Stagflation is Here, and It is a Weapon of Mass Destruction

U.S. wholesale prices in July 2008 grew at the fastest rate since 1981. The cost of materials has risen 9.8 percent in the last twelve months, according to government data. While gasoline prices fell the week of August 18 to $3.74 a gallon, they remain far higher than the $2.40 a gallon of mid-2005. Meanwhile, the price of food at the grocery store continues to climb, while consumer purchasing power remains stagnant.

According to analyst Michael Hodges, average family income adjusted for inflation declined six percent from 1999 to 2005, and the drop has continued since then. With families no longer able to borrow on their shrinking home equity for purchasing power due to the collapse of the housing bubble, they have had to tap into their savings. According to Hodges, “As of summer 2007, savings were a negative 1.3 percent, an all-time low.” (Grandfather Economic Report, August 2008)

The government claimed that GDP grew during the 2nd quarter of 2008—hence no recession—admitting at the same time that the chief driver of growth was the economic stimulus rebates sent by the IRS to taxpayers. The rebates, however, were paid for by more government debt, with a $490 billion federal budget deficit projected for fiscal year 2009 that begins next month.

Whether even the paltry 2nd quarter growth at an annual rate of 1.9 percent was “real” is subject to debate. Since the U.S. began to lose its manufacturing economy, a long-term slide that began after the Vietnam War, all economic growth has been in the services and financial sectors.

The government counts any financial transaction that can be taxed as part of the GDP whether or not it results in the creation of goods and services of tangible value. Bizarrely, a transaction can add to GDP even if it is based on money that has been borrowed and must be repaid with interest in the future.

So this type of debt-based GDP growth can actually be destructive in the long-run. This has happened in the U.S., where total household, student, business, and government debt will soon be pushing $70 trillion against an annual GDP in 2007 of $13.8 trillion.

The best measure of economic health for working men and women in the producing economy is not GDP but rather M1. This is money available as immediate purchasing power from cash-on-hand, checking accounts, and NOW accounts.

M1 measures what can be bought today without a consumer being required to incur new debt. The amount of money available as M1 has fluctuated in the $1.3-$1.4 trillion range since December 2003. Growth in M1 has essentially been flat.

This means that even moderate inflation can result in erosion of consumer purchasing power. By this measure, the producing economy has been in a mild recession for four-and-a-half years. But according to the M1 Money Stock Forecast of the independent Financial Forecast Center, M1 was projected to fall from June to August of 2008 from 1.3883 trillion to 1.386 trillion.

Thus with inflation now running at close to ten percent, we have entered a period of stagflation potentially worse than the 1970s. And stagflation is nothing less than a weapon of mass destruction aimed at the livelihoods not only of the elderly and those on fixed incomes, but also on students, the unemployed, families, and almost everyone who has a job in the producing economy.

Richard C. Cook is the author of We Hold These Truths: The Hope of Monetary Reform, scheduled to appear by September 2007. A retired federal analyst, his career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. He is also author of Challenger Revealed: An Insider’s Account of How the Reagan AdministrationCaused the Greatest Tragedy of the Space Age. Read other articles by Richard, or visit Richard's website.

3 comments on this article so far ...

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  1. Joseph Danison said on August 20th, 2008 at 7:38pm #

    More bad news and a timely and important snippet to be savored in all its dark simplicity.

    Perhaps Richard Cook should have noted also that in the stagflating economy of yesteryear that Paul Volcker tried to strangle with tough love, inflation at 14+%, interest rates at 20%, there was latent productive capacity, a healthy real estate market, and strong M1. Volcker could give the economic engine a solid bash with a big wrench of interest rate hikes with the certainty that it might stutter but would easily recover and head on down the road.

    That is not the case now. Bernanke cannot raise interest rates to check inflation without killing the economy for sure because the productive economic muscle has been devoured by financial cannibals. The real estate market is collapsing. M1 is falling. This is a game that hasn’t been played before.

    This inflation does not reflect frustrated demand. This inflation is dollars fluttering home with nowhere to roost, useless speculative dollars, bubble dollars that were created without collateral to reflect real value, greed dollars issued on great expectations, great unfounded expectations of the financial class. These worthless dollars are fleeing the tumbling commodities market, the toxic bond market, the commercial paper market, etc. These are homeless, orphaned dollars, the little imaginary magic carpets of the money-for-nothing class, the class whose anti-productive financial activities accounts for 20% or more of US GDP according to Kevin Phillips.

    So, here’s the unique feature of this stagflation: it isn’t really stagflation. It is deflation. The dollar has been delinked from its productive collateral base and its inflation is unrelated to the supply/demand equation of yore. People do not have more dollars that buy less. They have less dollars that buy less. That is deflation from hell.

    Time for another stimulus payment! As Jamie Limon ( Morgan CEO, financial czar, and master of the universe ) implied in his chat with Charlie Rose a month or so back, this will probably be necessary.

    This interesting feature of the end times economy should inspire us all to leap up from our chairs and shout: “What the fu……….k?” We can see it coming. It’s not the horizon, its the cliff edge, the end of the road. It’s not a bad dream and we won’t wake up. Denial is not a river in Egypt.

    Therefore, here’s the solution: get off the bus. Realize that the private monetary system is a complete and disastrous failure.


    We are an inventive, resourceful people, and we’ve always liked the idea of democracy and two chickens in every pot, even though this has always been in the idea stage. The end times of the privatized system are upon us, so why don’t we start talking about solutions and a new chapter in the American story that features real democracy and money by and for the people, not merely for the rich.

    I know Richard Cook knows this new story and I’d rather hear him tell it rather than join in the doom and gloom chorus.

    That’s all you hear these days, this incessant croaking of frogs in the night.

  2. Kurtosis said on August 20th, 2008 at 9:29pm #

    Joseph is correct, it’s deflation, not inflation or stagflation. It’s taken about a year for markets to catch up to that fact, but it’s happening fast now:

    Fundamentally, you can’t originate $2.5T+ of bad, subprime-backed debt, watch it all default, and expect any kind of inflation out of that. Inflation/Deflation is not price increases/decreases, it is increases/decreases in the supply of money and credit. Price increases/decreases are only a symptom, not the definition.

  3. brs said on August 21st, 2008 at 11:50am #

    Paul Volcker’s bashing crashed the economy and it stayed crashed. By 1991 Bill Clinton could run on the slogan It’s the economy, Stupid because the economy had not recovered from the bashing it received. Neither Volcker’s interst rate hikes or reagans tax cuts for the rich helped. It still has not recovered. We are living on borrowed money and borrowed time. Too much has benn shoveled into too few hands. They rich have not made productive investments with reagans and bush’s little gifts. If they had companies like GM and Chrysler would be competetive and still paying decent wages.