Stagflation Conflagration

Its not every day that Central Bankers or renowned market players speak the truth but we’ve had a sudden spate of it lately, probably wanting to distance themselves from the politicians and the press just in case the proletariat revolt and start burning people for turning them into serfs.

Jean-Claude Trichet said we were seeing “an ongoing, very significant market correction,” during an interview with the BBC business editor Robert Peston.
 
He warned that if central banks were tempted to cut interest rates now, more serious problems could follow.

Like stagflation for example. Stimulation packages, if overdone just kill the value of well, just about everything. Does that sound just a little bit familiar?

He compared recent rises in energy and food prices to the 1970s oil shock.
 
Mr Trichet said the failure of most European economies to digest tighter monetary policy in the 1970s caused higher wages that undermined the region’s ability to compete. The net result was mass unemployment.

The point might be a bit vague but political attempts to avoid recession by increasing the availability of money in anything but a micro-economy have never worked in the long term. You pay twice as much later on.

He [George Soros] told BBC business editor Robert Peston that the “acute phase” of the credit crunch may be over but effects on the real economy are yet to be felt.
 
He warned the “financial bubble” of the last 25 years could be drawing to an end and the post World War II “super-boom” era could also be over.
 
He predicted a “more severe and longer” US slowdown than most people expect.

For a man who has played a major part in destabilising economies in order to make money he now lectures about “moral hazard”. Well I guess it takes a thief to catch a thief.

Yes, we know that all this could have been averted through proper regulation but there hasn’t been thorough market regulation in western economies for most of my lifetime. I would however argue that the central banks have administered sufficient medicine to prevent a banking crisis and now they have to back-off fast because they have over administered the saccharine medicine and the wave of inevitable inflation is building-up towards a tsunami. It was never going to be easy but by extending the original remit of preventing a banking crisis into preventing a recession they will trigger an ever greater and deeper recession than the original crisis presented. We actually need a recession, and we need it fast.

[James also has a few thoughts on the subject]