All Roads Lead to Stagflation—This Is How We Got Here
The comments below are an edited and abridged synopsis of an article by Adem Tumerkan
US exports have risen sharply since the dollar has weakened, but you can’t just cheapen your currency to get never-ending growth. The weakening dollar is helping GDP temporarily; the longer it continues, the more prices will rise throughout the economy, negatively affecting it.
America’s export growth isn’t sustainable. As inflation starts trickling into the economy (because all prices don’t rise at the same pace), the whole will be negatively affected.
The weaker currency discourages imports and promotes exports, thus increasing net-exports. But with 70% of US growth driven by consumption, the ongoing inflation will eventually damage the economy.
The Fed has tied itself to 2% inflation, so the market will expect it to start aggressively hiking rates once inflation hits 2%, most likely sending the economy into a recession.
The US economy, fragile and heading towards stagflation, can’t sustain higher rates. The last time there was stagflation was during the 1970s. The US escaped, thanks to Kissinger setting up the petrodollar, and Fed Chairman Paul Volcker hiking rates to around 20%.
Imagine today if interest on the record amount of government, auto, college, mortgage and credit card debt all shot up to 15-20%. The government could never allow that to happen.
The Fed either fights inflation and raises rates faster, which will send the economy spiraling into a debt-ridden collapse, or it ditches its inflation target, and lets prices rise in attempt to get more economic growth.
Eventually inflation will be noticed, and creditors will start raising interest rates on their own. If the dollar keeps rising, US exports will fall and imports will rise, negatively affecting GDP and the trade deficit. Things are going to get choppy.