Inflation, stagflation, and recession, or in reverse order, whichever way, those are the three possibilities that we are experiencing in the U.S. economy.

Inflation is what we’re experiencing now.

All of us are experiencing that the prices are higher than we have experienced for a long time. When there’s high inflation, goods and services are less affordable. That’s very easy to understand. To conquer inflation the Federal Reserve will raise interest rates. In doing so, that will dampen demand. All of us will spend less because we feel less comfortable spending money, because it’s harder to get money we need, from wages from credit or loans because the cost of borrowing has gone up. So that’s one way to fight inflation.

Will the Fed blink? What does that mean?

“Blink” means, are they going to be able to stop increasing rates before inflation is really under control. You could just keep raising interest rates, and inflation doesn’t come down enough, you will destroy the economy, totally destroy it. This time around, the inflation is not created by demand only, it’s also by supply. There’s not much we can do about supply. The only thing we can do is control demand – minimize spending.

If the Fed “blinks” before their target is reached, which is 2% inflation, we are at 9.1% at the moment, it will take a bit of time and quite a bit of increase in interest rates. If they stop somewhere around 5%, we will still be at 5%. That’s 3% more than their target. Then what do we have? We still have inflation, and we still have a very much slowing economy.

And now we have a very much slowing economy with inflation – stagflation.

Stagflation is low growth, high inflation. That’s not good. Low growth is not good for anybody:

  • We don’t get better jobs.
  • We don’t get better pay.
  • We don’t get whatever that we need to do to grow an economy.

An inflation will continue going higher, so whatever we do will not be sufficient to maintain a certain standard of living to bring the country to the next level.

Stagflation is probably the worst overall. That is the 1970s experience. That was exactly when Arthur Burns, chairman at the time of Federal Reserve, stopped raising rates because he was very concerned about recession.

Let’s go to recession. If we can bring the demand down to bring inflation down, one of the problems with that is that we may end up in a recession.

Recession’s technical definition is quarter by quarter, back to back, negative GDP growth. Meaning that we are actually going backwards in our economy. Two quarters is nothing. We can all sustain two quarters. But it could be 8 quarters, could be 10 quarters.

So, is that worse? Yes, it feels worse. But when we’re done with recession, we’re coming out with a new economic cycle, and we’re back to growth again. Stagflation doesn’t get you there. So the cure to stagflation, is the increasing interest rates, because we can no longer sustain the stagflation. The Federal Reserve will come in and say, “Gosh, I guess I blinked too early. Now let’s raise rates all over again.” So it’s just really basically taking a pause. And so that’s not probably gonna be the best for everyone. Because in the long run, we’re still gonna end up in recession. It’s just a matter of when we’re gonna do it.

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