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Stagflation Will Follow Fed's Inflation


The Federal Reserve’s QE2 stimulus has stoked a fire storm of global of inflation. What began in the Middle East and North Africa as a rebellion against rising food and basic essentials for some of the poorest people on earth has now spread to supposed success stories, like China. Over the weekend, rioting broke out in Beijing, Shanghai and 11 other major cities to the chant of “We want food, we want work, we want housing, we want fairness”. As inflation moves on from food to rising fuel costs and then mounting raw material imports; the U.S. is about to be hammered by the combination of higher prices squeezing consumer discretionary spending and higher material costs hurting business profits. Americans need to be prepared this fall for the economy’s ugliest witch’s brew: STAGFLATION.

Chinese police deployed in large numbers this weekend to quash what is being called the “Jasmine Revolution”. China’s authoritarian Communist leadership is trying to short-circuit dissent before it spins into the type of popular uprisings seen in Egypt, Tunisia, Bahrain, Yemen, Algeria and Libya; where over 500 people have died. Although Chinese law enforcement tried to crack down on Internet communications, cell phone pictures and videos of protestor’s resentment and desperation is leaking out.

Americans should not be fooled that these protests are someone else’s problems. We may only spend about 10% of our income on food, but much of the rest of the world spends 1/2 their income on food. When people who have little or nothing see what little they have evaporating, there is no downside to violent confrontation with the establishment.

As Federal Reserve Chairman Ben Bernanke is caught in the headlights of world anger over the inflationary ravages from his flooding the world with cheap dollars; he lashed out at investors for fanning inflation.

Blaming investors is disingenuous in the extreme; it has been the financial engineering of the US Federal Reserve’s serial paper money printing that continues to cause havoc around the world. The Fed’s repetition of stimulus spending was the father of the 1990’s tech stock bubble and 2000’s US housing bubble. Like all government intrusions into the economy, the eventual pay-back was the mother of two of the worst economic crashes since the Great Depression and is destined to cause more grief in this cycle.

The Fed may pretend to be independent, but its members are Congressional appointees. Putting a book of matches in an individual’s hands is usually only dangerous to the individual, but empowering the Fed to engage in politically motivated “Quantitative Easing” is equivalent of distributing flame throwers to arsonists and sending them off to spread their passion across the globe. With the CRB index of food prices up 42% in the last twelve months, the Fed has established itself as a most dangerous government tool.

As trouble spread to China; over 100 Chinese activists were rounded up, confined to their homes, or went missing over the week-end according to the Hong Kong-based Centre for Human Rights and Democracy. The word “jasmine” is now blocked on Chinese web-sites and error messages now appear warning the user to refrain from postings with “political, sensitive … or other inappropriate content”. Mass text messaging services are unavailable in Beijing and other cities with protest activity, due to “technical issues” according to China Mobile customer service representatives.

China’s President Hu Jintao gave an unscheduled speech to top party leaders yesterday, asking them to “solve prominent problems which might harm the harmony and stability of the society”. Hu told the senior politicians and officials to provide better social services to people and improve management of information on the Internet “to guide public opinion” according to the official Xinhua News Agency reported. With the public’s frustration on the boil, China may be on the verge of the most significant unrest since the 1989 suppression of protestors in Tiananmen Square led to the collapse of a number of communist governments around the world and forced Beijing to embrace “Capitalism with Chinese Characters”.

The U.S. Federal Reserve managed to clandestinely stimulate the tech stock and housing bomb fires that burned bright, before predictably twice scorching the economy. I believe this time the public will demand that the serial arsonists at the Fed have their quantitative easing flame thrower repossessed before they create another Y2K or Credit Crisis level of damage.

Over the next six months American consumers and producers are doomed to suffering pain. This nasty combination will inevitably begin to slow the economy and employment will suffer. Welcome to stagflation.

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