The odds of stagflation eroding and gradually destroying the buying power of the average consumer in coming years is more likely than many people realize. Too many people little difference exists between stagflation and inflation, however, the distinction or difference is that stagflation is often linked to times of economic slow growth. The idea that inflation cannot exist in a period of slow growth is a myth that many people believe, this may soon be proven false. A great deal of what something is worth is related to where people actually put their wealth. The sectors or areas of the economy that savers and investors deem safe are more important than most people realize.
Price stability or even minor deflation should not be a major problem but due to the fact we seek to move upward and ever higher adds to the idea the 2% inflation target deemed as a desirable rate by most central banks is the economic sweet spot. The concept a little inflation is a good thing appears to be based on the idea it adds to the illusion of overall economic growth. This arbitrary number or target also gives central banks far more flexibility in defending a policy that results in printing fiat money (currency which derives its value from government regulation or law rather than backed by any commodity) as well as deficit government spending.
For years savers have poured a great deal of their savings into paper promises such as pensions, bonds, stocks, and such. Using a slew of faulty methods to compute inflation we are constantly informed consumers are not losing a great deal of buying power, however, these methods often underweight important necessities and overweight the cost of televisions and other electronic gadgets that are falling in price. Even low-interest rates feed into this false narrative. If you want a better picture of what is actually happening focus on the replacement and repair cost that occur following a storm or other natural disaster.
When it comes to economic policy it seems, sustainability is put on the back burner and the goal is just to create growth tomorrow, or in other words, full speed ahead. Our leaders find strong allies with the lobbyist who grease the wheels of commerce. A society where consumers conserve, reducing waste, and any talk of austerity usually conflicts with the goals of lobbyist hell bent on creating growth at any cost. In many cases, austerity measures have been associated with public protest and claims of a significant decline in the standard of living. The argument by contemporary Keynesian economists that budget deficits are appropriate when an economy is in recession encourage governments to try to spend their way out of trouble.
What we should be asking is if current policies are really creating tangible and solid growth and question if they are sustainable over time. Those touting the destructive force of deflation often use Japan as an example of what we should avoid at all cost. It could be argued that the so-called “lost decades” that Japan has experienced is the result of other factors rather than the country not adding enough stimulus. The fact is after its massive bubble burst Japan never really faced its demons and chose to keep alive zombie banks and companies coupled with increased competition from China as it began to export low price goods to America as well as dreadful demographics are all contributors to Japan’s problems.
We should remember that Japan’s economy is driven by exports this alone makes it a far different animal than our economy. In truth Japan has not fallen off the face of the earth as its real estate and other markets fell back to reasonable levels. Until now because of their low interest rates the yen has been a favorite of those playing the carry trade game and is still seen by many as a safe haven currency. The problem they now face is at some point because of the governments unsustainable deficit the world will at some point declare the yen as worthless and the inflation they have sought for so long will wash over them taking with it much of their buying power.
H/T: Bruce Wilds