| Stagflation Risks, Housing Impact Spreads To Broader Economy The risk of stagflation is growing right now. If the Fed continues to lower interest rates to bail out troubled borrowers who have ARMs adjusting in 2008 (and mortgage-bond investors like banks and Gross's Pimco Bond Funds) to help keep the economy going inflation will probably increase. Oil is driving up inflation right now, but with lower interest rates the dollar will weaken against the euro and other major currencies, sparking import inflation. It will be a double-edged sword-higher inflation from oil and lower interest rates coupled with sluggish to declining growth in GDP...2008 will not be a good year for the economy.
The subprime mortgage debacle, credit crunch in August and September (which is making banks hesitant to lend since banks' balance sheets are getting dirtier by taking on these CDO's, SIVs, and mortgages), and falling home values will further exacerbate economic worries. The Federal Reserve cannot stop this one. Fiscal stimulus is needed, but even there the U.S. is runnning record budget deficits by running wars while keeping taxes low at the same time. No wonder folks are cutting back. Look for higher prices to continue and even higher taxes in the years to come to make up for that lost sales tax revenue state governments are losing due to lower consumer spending and, hence, retail sales. |
