Our Own Lost Decade: ‘Stagflation’ and the Pathway Out of this Recession

Our Own Lost Decade: ‘Stagflation’ and the Pathway Out of this Recession

Dear Reader,

A couple of weeks ago we touched on the stagflation puzzle. And then I deviated back onto gold.

But today, it’s important to come back to the topic of stagflation.

Depending on how long you’ve been subscribing to my daily musings, you’ll probably know I’ve spent quite a few years predicting a recession.

Well, look what went and found us.

Of course, now that we’re six months into a health crisis that morphed into an economic crisis, I can assure you, this wasn’t what I was suggesting.

Quite frankly, it’s still too early to calculate the severity and economic devastation. Any estimate on the billions of dollars of damage, is going to end up wrong.

Investors need to note that not only is this recession different, but there’s no easy path to the other side.

And before said other side is reached, we will be faced with the ugliness that is stagflation.

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What the data hides

For those new to these pages, I don’t always talk about gold. It’s just had a such a stellar run that it’s hard for a gold bull not to enjoy rattling on it about it. A gold bear market will do that to you.

Prior to 2020, I’ve spent a good couple of years pulling apart the economic data we’re fed.

The problem with the data that filters through, is how often it comes with a positive spin, when really, the news ain’t so great.

Trade surplus data is a good example of this.

A trade surplus means we are exporting more than we are importing.

Now if this was because we were producing more goods and that was driving exports, we could get excited.

An increase in our exports tells us as a country what we make is in high demand overseas.

The thing is, this isn’t the case. Our trade surplus has been growing steadily since 2018 because imports relative to exports are falling.

Meaning we are bringing in less.

Which in a consumption-based economy is a bad sign. This was our first clue the consumer was weary.

Another clue that our uninterrupted prosperity was coming to end, came from our own Reserve Bank of Australia.

Our inflation-at-any-cost mates over at the RBA have been lowering rates since 2016. All the numbers that the RBA had told us were good numbers, suddenly became not so good when the economy wasn’t moving in the direction it wanted.

These reassurances were backed up by some whopping furphies back in 2019.

While assuring us everything was just fine, they’d then use a bunch of data as further justifications for rate cuts.

Unemployment was stubborn at 5.1%. The inflation rate wouldn’t budge higher from 1.9%. Australia’s growth domestic product was lagging at
1.8%.

They looked us dead in the eyes and quietly reassured us that rates would most certainly increase.

That these rate cuts were temporary…

Four years later and the cash rate is scraping the bottom of the barrel.

Rounding all this out, has resulted in the incredible drop in private credit growth in the last few years.

Aside from a very short spike in March, private credit consumption started falling the start of 2018.

Private credit falling tells us that consumers are weary and their ability to take on more debt.

That despite dirt-cheap rates, we have hit our maximum levels of the amount of debt we’re willing to have.

Here’s the thing.

Modern economics relies on the never-ending expansion of debt in order for the economy to ‘grow’ at a rate central bankers like.

But all the data suggests we’ve reached our private debt limits.

Debt forgiveness?

Today we find ourselves in a pickle.

Even before the ‘rona made its way to our shores, things were wobbly in the Aussie economy.

In fact if it wasn’t for our large migration policy, Australia would’ve tumbled into a recession years ago.

What happens from here is messy.

One quarter of the working population is on some sort of government handout.

The boffins in Federal government are working on ways to adopt ‘chapter 11’ style bankruptcy laws similar to the US for small-to medium-enterprises (SMEs).

Chapter 11 in the US allows a company the ability to ‘trade out’ of receivership without going into the hands of an administrator.

In other words, if this were to pass, SMEs would be ‘protected’ from meeting debt obligations while the company tried to get back on their feet.

The fact that this is even a consideration goes to show you the dire state of SME sector.

To compound all of this, we’ve got a private sector that isn’t able to take on any more debt.

And we don’t have the hundreds of thousands of migrants coming into Australia to prop the economy up either.

We’ve been slammed from every side.

The lost decade

We still don’t know who the have and have nots are as we try to climb out of this. The ability to grow and use debt to come out of this for the private sector is gone. The rise of some sort of debt forgiveness to keep businesses going is looking increasingly likely.

Sectors of the Aussie economy are still yet to face their day of reckoning — think commercial buildings and shopping centres.

Meaning the failings inside Australia are yet to fully reveal themselves.

Stagflation can be boiled down to this.

It’s high price inflation compounded by high unemployment and stagnant economic growth.

And the one thing the economic textbooks said couldn’t happen, is coming to an economy near you.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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