ALL THINGS BIG AND SMALL 2.0

  Many Economists see a period of both Inflation as well as Recession for the US economy in the months ahead- two scenarios at opposite ends of the spectrum of possibilities for an economy. This is a situation which they call Stagflation- a stagnant but also inflationary economy.  In this post we explain why, how Stagflation happens and the sequence of events. The flow chart above together with the notes below explains how the US Administration’s trade war tariffs can lead to stagflation:  • The process starts at the top with the implementation of high tariffs (Tariff Policy). • This leads to higher import costs, which in turn causes higher prices for goods—resulting in inflation. • As prices rise, consumers cut back on spending, which reduces corporate earnings. • Lower earnings force companies to lay off workers, increasing unemployment. • The combination of reduced spending and higher unemployment leads to a recession or stagnation. • At the bottom, ...

The media, analysts, fund managers and assorted pundits have been increasingly strident about China's huge debt overhang amounting to trillions of dollars; warning that it will trigger a financial and economic crisis not only for China but the world soon. We have seen the effects of the current China slowdown on everything from demand for iron ore to demand for luxury goods, as China's economy forms a larger and  larger part of the world economy. The current economic slowdown in China is the result not only of the ongoing Chinese government;s economic structural reforms but also of years of monetary quantitative easing (QE); beginning with the mega economic stimulus of late 2008 which pumped US$600 billion into the economy. This cheap money fuelled the economy, resulting in an overheated real estate sector, over-investment in manufacturing, wasteful projects, underutilised infrastructure. China's demand for commodities such as oil, coal, iron, steel and agricultural co...