US Actual Inflation Trend Heading for Stagflation or Deflation?

By: Jas_Jain

Inflationists have been crying wolf for the past three plus years despite the fact that the annualized headline CPI, including food and energy, and not seasonally adjusted, for 12M, 6M, and 3M has fluctuated around the 20-year trend of 3%+- (yes, the annualized inflation in the US for the past 20 years is 3.08%). As a matter of fact, despite huge run up in crude oil and agriculturals during the past year the CPI rates in the graph are below their highs during 2005-07. Labor costs are by far the most dominant contributor to the CPI.

Greenspan-Bernanke have followed a controlled inflation regime of 3% rather than the proclaimed policy of “price stability.” Why they have followed such a regime is a very profound question and its real answers will reveal the criminal nature of the Federal Reserve – harming the general population for the benefit of Bankrupters and Fraudsters of New York City – but I will cover that at some other time. The whole financial system (and the economy) has been criminalized with the tacit support of the Fed and the USG.

Inflation rate lags the economy and there is nothing like a severe recession to bring the headline CPI rate crashing down. For example, the double-dip recession of 1980-82 brought the inflation rate down from 15% to 4%. The controlled inflation regime will come to an abrupt end as the recession turns into something more serious than the last two recessions. The $64K question is: In which direction? My forecast is that it will crash on the downside, i.e., come down sharply, while some still talk about stagflation and “hyperinflation.” Stagflation was 70s show and that show (or movie) will not replay. Sorry, I don't buy into Shadow Statistics and M3 as proxy for the inflation rate.

Increase in the total household debt is inflationary and decrease in the household debt is deflationary. A very high rate of growth in the household debt, mostly via loose mortgage lending, became necessary to support the controlled inflation regime since 2002 and to artificially boost the economy for political purposes. Now that game is coming to an abrupt end due to the mortgage credit crisis. It is too bad for Bush's legacy and for McCain that the game came to an end a year too soon. Manipulations to boost the economy only work for so long before they turn against. 

The housing bubble postponed the deflationary depression of the Longwave and its burst will usher in the inevitable. The incessant interventions from the Fed and the USG will dampen the severity but they will also prolong the depression by postponing the adjustments that need to take place, especially, 30-50% drop in home prices, nationally, and more in the bubble areas. “Bankers' mischief” (imprudent loans and financing) never fails to bring on economic and financial “catastrophes,” according to Schumpeter. Needless to say, the “bankers' mischief” attained new heights in recent years. One wonders what the Fed and the USG were doing. Isn't it amazing that these things get worse over time in subsequent cycles? Crooks learn from history (how to do it) and the general population doesn't! Bubbles are superb lubricants for fraud. 

It is the Debt, Stupid! (That will dictate the direction of the inflation rate).

By Jas Jain , Ph.D.
the Prophet of Doom and Gloom

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