Will we have inflation, deflation, or both? The answer may very well be first we will have the one, then the other, and in the end we will wind up with both.
Peter, I love how your mind works. In all of the mixed and muddled signals, you zero in on just the right indicators to give us a clearer picture. Most analysts have an agenda they want to prove - while you just want to get to the truth. This makes your analysis priceless!
And your conclusions match up with common-sense observations. If people have to spend more on the obligatory purchases, they will likely cut back on discretionary purchases. In terms of supply and demand, less demand for, say, clothes - a discretionary purchase - will put pressure to lower the prices on clothes, out of competition. I’m already reading predictions of a bleak Holiday season from retailers, and there have been many articles about how consumer credit-card debt is pretty much maxed out. So the real-world picture of higher prices on some things (rent, health care, etc.) plus desperate producers of discretionary goods competing to stay in the game, will result in stagflation. I was majoring in economics during the stagflation of the 70s, so I remember well the effects, along with the puzzlement of the economics profession as they tried to figure out solutions.
The wild cards next year will be: how the unraveling of China’s economy will affect us, and how the policies of the post-election era (Trump’s tariffs, or Kamala’s insanities) also will affect us. So maybe stagflation for the near future, then WHOOPS!
One of the great risks of the stagflation scenario is what economists call a "balance sheet recession", where people put off consumption and purchases in favor of paying down debt and clearing off their credit cards.
When this becomes a prevailing phenomenon you have reduced consumption, and therefore reduced demand, which removes the primary source of upward price pressures in the marketplace. That in turn creates a disincentive for suppliers who will either cut back on production or exit markets altogether.
The new equilibrium pricing position is reached not only is there less supply and less demand, but less employment and less income as well.
Another possible scenario is that, instead of seeing a replay of the Great Financial Crisis in 2008, or even the 1930's Great Depression, we might be slipping into a correction more similar to the Long Depression of the 1870s.
The Long Depression is chronicled in the US as lasting five years, but it was part of a larger global economic downturn that for much of the world lasted nearly 20 years.
One reason that has been put forward for the Long Depression was that technology and innovation had reached a cyclical peak, and a measure of retrenchment was necessary before business structures could embrace a new round of innovation.
Whether the US and the world are similarly at the end of an innovation cycle is not something that can be accurately gauged until well after the fact, but there are reasons to suspect that might be the case. If that is the case, a new market shock like the subprime mortgage crisis and subsequent Great Financial Crisis could trigger an extended retrenchment/"lost decade" reaction across the global economy.
It's worth noting that the global economy was far less integrated in 1873 than it was in 1929, 2008, or today. Integration has been an increasing aspect of the global economy from 1873 until today. The consequences of a market shock in a major financial market such as Wall Street will absolutely have global ramifications even greater than in 2008.
Peter, I love how your mind works. In all of the mixed and muddled signals, you zero in on just the right indicators to give us a clearer picture. Most analysts have an agenda they want to prove - while you just want to get to the truth. This makes your analysis priceless!
And your conclusions match up with common-sense observations. If people have to spend more on the obligatory purchases, they will likely cut back on discretionary purchases. In terms of supply and demand, less demand for, say, clothes - a discretionary purchase - will put pressure to lower the prices on clothes, out of competition. I’m already reading predictions of a bleak Holiday season from retailers, and there have been many articles about how consumer credit-card debt is pretty much maxed out. So the real-world picture of higher prices on some things (rent, health care, etc.) plus desperate producers of discretionary goods competing to stay in the game, will result in stagflation. I was majoring in economics during the stagflation of the 70s, so I remember well the effects, along with the puzzlement of the economics profession as they tried to figure out solutions.
The wild cards next year will be: how the unraveling of China’s economy will affect us, and how the policies of the post-election era (Trump’s tariffs, or Kamala’s insanities) also will affect us. So maybe stagflation for the near future, then WHOOPS!
As always, thank you for your kind words.
One of the great risks of the stagflation scenario is what economists call a "balance sheet recession", where people put off consumption and purchases in favor of paying down debt and clearing off their credit cards.
When this becomes a prevailing phenomenon you have reduced consumption, and therefore reduced demand, which removes the primary source of upward price pressures in the marketplace. That in turn creates a disincentive for suppliers who will either cut back on production or exit markets altogether.
The new equilibrium pricing position is reached not only is there less supply and less demand, but less employment and less income as well.
Another possible scenario is that, instead of seeing a replay of the Great Financial Crisis in 2008, or even the 1930's Great Depression, we might be slipping into a correction more similar to the Long Depression of the 1870s.
https://libertystreeteconomics.newyorkfed.org/2016/02/crisis-chronicles-the-long-depression-and-the-panic-of-1873/
The Long Depression is chronicled in the US as lasting five years, but it was part of a larger global economic downturn that for much of the world lasted nearly 20 years.
One reason that has been put forward for the Long Depression was that technology and innovation had reached a cyclical peak, and a measure of retrenchment was necessary before business structures could embrace a new round of innovation.
Whether the US and the world are similarly at the end of an innovation cycle is not something that can be accurately gauged until well after the fact, but there are reasons to suspect that might be the case. If that is the case, a new market shock like the subprime mortgage crisis and subsequent Great Financial Crisis could trigger an extended retrenchment/"lost decade" reaction across the global economy.
It's worth noting that the global economy was far less integrated in 1873 than it was in 1929, 2008, or today. Integration has been an increasing aspect of the global economy from 1873 until today. The consequences of a market shock in a major financial market such as Wall Street will absolutely have global ramifications even greater than in 2008.