Op-Ed: The Stagflation Equation
This 21st-century depression will be like nothing we've seen before.
Editor's Note: Ron Coby is an industry veteran who has worked as a broker, investment banker, Wall Street analyst, market strategist, venture capitalist and hedge fund manager. His short-side strategy is detailed in his forthcoming book, Discover the Upside of Down. Ron and his business partner, Denny Lamson, are registered investment advisers for Coby Lamson Capital Management.
Inflation + Deflation = Stagflation
When the value of everything you own is falling, and the cost of everything you need to survive is rising, you're experiencing stagflation. (Of course, it's not your father's stagflation, as Professor Depew has noted.)
Today, the stagnation (deflation) side of stagflation is very evident. Frightened investors are seeing their 401ks drop precipitously; home values continue to decline as foreclosures increase. The economy is, at best, in a state of stagnation; at worst, it's moved into a deep recession.
The inflation side of the stagflation equation is also clear: We're all experiencing persistently high and rising prices in food, energy, health care and college tuition, even as the wholesale prices of oil and commodities have been cut in half. The current rally in the US dollar is only exacerbating that fall.
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Helicopter Ben and His Global Co-pilots
On October 15th, Ben Bernanke was on TV explaining why we aren't going to experience a 1930's-style Great Depression. He argued that the government isn't restricting money supply, as it did in the past; instead, it's flooding the markets with liquidity.
As the bailouts and rescue packages mount -- and as short-term money supply soars beyond any previously imaginable heights -- we're forced to acknowledge that Ben is probably 100% correct. Worldwide, investors who have been fearful of an impending deflationary depression will soon be confronted with a different reality.
In addition to Bernanke's fleet of hyperinflation helicopters dropping dollar bills all over America, other nations have joined the effort to re-inflate a deflating world economy - by dropping their own currencies on their own countries.
Global paper currency creation is simply exploding in an effort to deal with this financial crisis. What most people -- including Ben Bernanke and his global co-pilots -- don't seem to be taking into account is that, while we may be in a situation similar to 1929, this type of untested government response only means a new and unexpected result is likely to take place.
The New Great Depression of the 21st Century
In 1929, we had an enormous amount of debt against an overvalued and crashing asset class. Back then, for only a $10 margin deposit, you could buy $100 of stock. In this new century, that same practice was used in the real estate markets. Hordes of unqualified buyers were allowed to buy homes with little or nothing as an initial down payment.
While the collapse of an over-leveraged 1929 stock market led to the Great Depression, our slowly dissolving over-leveraged real estate market has created a slow-motion version of that 1929 crash. Stocks can be sold in a moment, but homes can take months or years. Therein lies the difference between these otherwise very similar crashes - a difference which will likely lead, as I've said, to very different outcomes.
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