Still, stagflation became a reality for one simple reason: when the market drops and it is not allowed to hit rock bottom, capital waits it out. Think about this in your daily life. If you know that the supermarket is artificially inflating the price of Corn Flakes – and if you can survive without Corn Flakes for a week –the price will go down. In the book market, we see this all the time: people wait for the paperback to come out so that they don’t have to spend quite so much on the hardcover.
The same principle holds true in real estate or investment finance. If the government keeps bad borrowers in their houses, the supply of available housing is artificially low. That keeps prices up. Smart investors wait until those bad borrowers go bankrupt, and then they buy. That’s also true in the investment market: why invest in new workers if you know that their price is being artificially stimulated by government subsidies? Eventually those subsidies will go away, and the price will go down for labor again.
So why was the stock market so high this year? Because the inflation in the currency caused people to run to invest in other commodities that would move up and down with the tides of the currency.
And why is the stock market now tanking? Because with the stagnant GDP – we are now in a minute or even negative growth period – people have no faith that companies will find a ready market for their goods. The assumption was that stagflation would not occur. Now the market knows that is wrong.
My good friend Bob Bonelli is a top finance guru. I discussed this situation with him at length this week. As he pointed out to me, in order to reduce the real unemployment rate 1%, GDP would have to grow 5% for the full year. That can’t happen with the current system of governance. Bob also told me he’d received a tweet from a follower this week: “Bob, can President Obama solve this economy with a speech?” Bob tweeted back: “Actually, a short speech would do it: ‘I am leaving office today!’”
Bob is right. If we want to know why the stock market dropped last week, all we have to do is look to the White House, where President Obama is busy eating burgers and partying with his Hollywood hip hop buddies. If he really wants to serve the country, he can just get out of the way.
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