Stagflation is here. I'm personally experiencing it right now -- it's becoming clear to me that my next job (whenever I find it) will not pay what I'm currently making. Meanwhile, all of my expenses are going up: food, gas, clothing, electricity, even water. I have a few investments, and yes stocks are going up, but at best all they are doing is keeping pace with inflation. When you think about it, stocks aren't really going up -- the dollars that the stocks are priced in are going down, creating the illusion that the market is growing.

Everyone here knows that an inflationary environment punishes savings and rewards debt. Combine that with ridiculously low interest rates, and that's going to factor into a lot of peoples' reasoning. As long as there is no incentive to save, people are going to take on as much debt as is available to them. I did hear one interesting thing last week: there's a rumor that the Fed is going to abandon QEII and stop buying Treasuries, possibly as soon as next month. If that happens, the interest rate on Treasuries will have to go up -- they won't sell otherwise. That should take care of the current artificially low interest rates, which will start providing savers with some reward, and reduce new debt. Of course, it will also hurt the deficit since the federal government will have to appropriate more money for interest payments.

Cousin Dave, do you realize what will happen if the Fed abandons QE? Half of the government's money supply is cut off, because the only way they're coming up with that $1.5T annual deficit is through blatant money-printing. They wouldn't even be able to cut all the entitlement checks.

Of course the alternative is the continuation of our current stagflation, which hurts everyone's standard of living in much the same way. The checks keep going out the door, but don't buy what they used to.

Either way this shakes out, it's going to be uncomfortable for many Americans.

I'm in the same boat Cousin Dave. I just found a new job (I start training Monday) but it's a big pay cut compared to what I make now. I'll be taking home $500 less a month than I did. If the cost of gas wasn't rising so rapidly I'd be able to scrape by with a few minor lifestyle changes. However, my gas expense has already gone up $50 in the last month. If this trend continues I'll be forced to take on a part-time job in my off hours to compensate for the increased costs of necessities. There are only so many things that can be cut out or changed in your lifestyle before there's nothing left.

Too bad the government has been keeping interest rates too low for too long to try to falsely spur growth.
Keysean economists see the interest rate as a "gas pedal" the lowere you press it the faster the economy. They have forced it near 0 for so long and are clueless as to why it isn't working.
Austrian econonics sees the interest rate more as the fuel gage. It is a gague to see how much people have saved/owe. The more people save the lowed the interst rate becomes ( Banks have a lot of money but few are borrowing they lower the rate to get more to borrow ). The more people owe /less savings the higher the interest rate becomes (banks have no $ since it's all loaned out so they charge more)
By the fed keeping interest rates unnaturally low they have surred borrowing beyond what it should be. People need to be saving, more as these ratios indicate, they are starting to but the government is doing the wrong thing, trying to spurr on random spending instead of savings.
When people return to a savings debt level that they are comfortable with the economy will then recover. Trying to force it before that, will just cause another bubble.

Fred:  We will all have jobs soon. The government is spending more on everything.
Mike:  Who is going to do the hiring? I'm investing less in everything.

→ Why Stimulus Doesn't Stimulate
=== ===
10/01/10 - Sacramento Bee by economist Ribert Higgs

[edited]  Team Obama theorizes that additional government spending (demand) will cause businesses to boost production, add jobs, and trigger additional consumer spending that will ripple through the economy for a stronger overall recovery.

Yes, consumer spending is about 70% of America's gross domestic product, and an increase in consumer spending would provide an immediate boost. But, consumer spending increased slightly as a percentage of GDP during the downturn.

There was no decline in consumer spending [in proportion to the economy], so what caused the downturn? Answer: a sharp decline in private investment.

To revive investment, the government needs to stop threatening the profits from investment and remove the regulation and uncertainty that paralyzes new, long-term projects.
=== ===

Another observation on consumer spending and saving:
www.cepr.net/index.php/blogs/beat-the-press/consumer-spending-continues-to-be-high-not-low
12/03/10
=== ===
The Washington Post repeated the story that consumers have been reluctant to spend due to the bad economy. In fact, the savings rate has hovered around 5.0 percent through the last 2 years. This is well below the pre-stock bubble average, which was more than 8.0 percent. This implies that consumers have continued to spend at an unusually rapid clip, albeit not as fast as when their spending was driven by $8 trillion of housing bubble wealth.
=== ===

Consumer spending is about the same part of the economy as it always has been. So, you can't blame our recession and job losses on some strange desire to not consume enough. That is a Keynesian fallacy, and a position our government likes to push because politicians always want to spend more.

I too am in the same boat as Cousin Dave. I have severance through April (thank GOD) but I'm pretty sure I'm going to take a $5000-$8000 a year pay cut, IF I can find a job. And yeah, gas just went up 50 cents a gallon almost overnight here.

"I'm making far less than I ever did, and most freelance writers are in the same boat."

Hey, I hear the Huffington Post is hiring...

"Cousin Dave, do you realize what will happen if the Fed abandons QE? Half of the government's money supply is cut off, because the only way they're coming up with that $1.5T annual deficit is through blatant money-printing. They wouldn't even be able to cut all the entitlement checks."

Yeah, I know. I sort of wish the Fed would just say "damn the torpedoes" and let it happen. I'd love to see the reaction in Washington when they suddenly find that no one will buy Treasuries any more. Of course, the panic among the privileged and entitled classes would make the recent happenings in Wisconsin look like a little-girls' sleepover. Hey, I'm already screwed, might as well go the whole hog!

"To revive investment, the government needs to stop threatening the profits from investment and remove the regulation and uncertainty that paralyzes new, long-term projects."

And that gets back to the root cause of stagflation: declining productivity. The decline, at least in this case, is due mostly to government actions. Those actions can include:

* Increasing taxes, which effectively reduces the rate of return on any investment. The funny thing about this stagflation period is that taxes haven't actually changed a lot over the past two years. However the mere *threat* of increasing taxes has caused a lot of investment money to go into tax avoiding rather than productivity increasing. And in an inflationary environment you get tax bracket creep, a de facto tax increase.
* Increasing regulation. We've got the regulatory agencies going crazy now, egged on to an extent by Congress. Regulation in some areas is expanding so rapidly that the regulated industries are pretty much paralyzed, particularly in the areas where "regulation" has morphed into prohibition (case in point: domestic oil). Regulation causes businesses to have to allocate more revenue into non-productive compliance activities, and it can cause sectors to disappear altogether.
* Winner-picking. This is perhaps the most pernicious of all, and right now is the first time it's been a big factor in America since the 1960s. It causes businesses to have to pour huge amounts of investment money into the non-productive activities of lobbying and legal finagling. It also tends to reduce competition, as businesses not favored drop out of the market.

Looks like the boat is crowded. I am in the same boat as Dave and Daghain - well pretty much.

I have done some additional training which help. Also, any job I get will likely be in a more expensive city. I figure my salary will be about the same. I will likely have 1.5-2hour commute each way (up from 15 minutes). Luckily I can take the train.

because the only way they're coming up with that $1.5T annual deficit is through blatant money-printing

Yes, and? I'm ok with that. When the Fed purposely inflates the dollar, then they're simply stealing money from people who have saved some money. People like me.

Punishing the responsible and rewarding the foolish is no way to go thru life.

"So where has the recent modest growth in the economy come from?"

There isn't recent growth. Have jobs increased? No. Are we producing more stuff? No. Are we getting richer? No.

The recent modest growth is basically a fiction. Why? Because GDP growth is calculated as the difference between current and previous nominal output, adjusted for inflation. Since the official inflation figure is clearly understated, the GDP growth figure is overstated as a consequence. Roughly speaking, they're measuring inflation and calling it GDP growth. (E.g. if your economy sold 10 pairs of shoes at $10 each last year, and this year sells 10 pairs of shoes at $11 each, that's just inflation of 10% with zero real growth .. but if you claim inflation is 5%, then your GDP growth calculations will show "growth" of 5%. It's easy to lie with inflation figures, there are loads of methods you can use ... e.g. if shoe inflation is 10% and spinach inflation is 5%, just claim that your 'basket of goods' is skewed towards spinach.) And the small improvements we're seeing in consumption spending are coming are being offset by savings reductions .. meaning people are eating into their savings to fund a so-called 'recovery', which thus isn't one.

Inflation is basically just 'people getting poorer, in market-distorted ways'. People are not spending because they have no money. Printing money doesn't make anyone richer. It didn't work in Zimbabwe, and it doesn't work in the US.

"Cousin Dave, do you realize what will happen if the Fed abandons QE? Half of the government's money supply is cut off, because the only way they're coming up with that $1.5T annual deficit is through blatant money-printing"

Funding entitlements through inflation is effectively a tax, distorted primarily on people with savings. It has limits though. Ask Mugabe. Ironically, Zimbabwe now uses the US dollar. Might turn out to not be the best choice.

Any increases in production will be siphoned off by the government tax and inflation machine, so don't bother trying to amass wealth or savings. Government sees savings, they will take it. Try hedge by buying gold? They'll just do a gold confiscation / nationalization once the currency starts unwinding.

Good luck folks. Gonna be a rough ride trying to get the parasite off yer backs.