Are We Heading Toward Stagflation?

The front page of the Financial Review carries the headline “Auction frenzy puts heat on RBA”.  Just a couple of weeks after the RBA cut our interest rate to an all-time low, confident it wouldn’t further inflate the property bubble, it is not a headline they would want to see.

This comes at a time when we are seeing the Vancouver market seeing big corrections after a similar cheap credit, Chinese investment, and mining boom fuelled property run. 

The implications are clear.  Our broader economy is weak, our unemployment rate, whilst the headline is looking ok, is becoming heavy in part time employment, wage growth at historic lows, and our dollar stubbornly higher than our economy needs it to be to compete in a world in a currency war.  The pressure is definitely on to ‘stimulate’ through dropping rates.

On the flip side those low rates are causing asset inflation in shares and, in particular, property to bubble like levels against those poor fundamentals.  The economic fact remains that you can’t have property prices consistently outperform wage growth as that, by definition, means it is debt funded growth and at some stage that debt becomes too great a burden… particularly when rates start to rise.  That scenario is a pretty good summary of the broader global economic set up as well.

This is starting to look like a ‘stagflation’ set up where you get high inflation against a slow growth economy.  It’s exactly what happened in the 1970’s.  In that decade we saw gold go from $36 to $678 or 1883% or 188% per year.

Our broader deflationary environment means this is not a simple question or clear path, we are, after all, in unchartered territory, but it is certainly something to keep an eye on….