More Credit Card Debt and Mortgage Crisis Fallout: Stagflation In The News

As the housing market feels the pain of a sharp correction, taking place in the darkening shadow of the mortgage and lending crisis, with a quivering mass of credit card debt starting to look as though it, too, could collapse, still more potential fallout finds its way into the news – stagflation. On December 13, 2007, Reuters defined stagflation as “a combination of stagnation and inflation, describes periods of rising prices coupled with stalled growth.”

If that definition sounds familiar, it could be because the United States experienced a similar situation, brought on, in part, by the oil crunch of the 1970's, when there were sufficient shortages to resort to assigned fuel station days, with long lines of vehicles, their drivers awaiting their turn to fill up their tanks. Another aspect of that era to remember is the difficulties that the US government had in selling their bonds. That, as we are reminded by the Reuters report, resulted in “a dollar crisis that saw asset prices fall and real interest rates spike.”

Of course, with that added recollection from the 1970's, that definition of stagnation may not only sound familiar, it may feel very present to those who are seeing the value of their primary asset, their home, leak away. Add ARMs rate increases, the rising price of oil, the increase of home heating costs and food prices, and the headline grabbing decline of the dollar, and a real sense of deja vu may descend upon average Americans and expert economists alike, particularly when debt-burdened consumers are forced to cut back on spending, which will contribute to a slowing rate of growth.

According to a December 18, 2007, article by Tom Hutchinson published in the Motley Fool, in the week prior to that date, “the Labor Department reported inflation numbers that were positively startling.” Those numbers include a “14.1 percent spike in energy costs and an astounding 34.8 percent jump in food costs,” according to the article, as well as a 3.2 percent rise in wholesale prices during the month of November, something not seen during a single month since 1973, and another record breaking 7.2 increase in producer prices, which hasn't happened since 1983. The article also points out that “core producer prices, which exclude food and energy, rose 0.4% in November, twice the consensus forecast,” noting that “economists are expecting higher inflation than we've seen in a long time for 2008.” Experts and officials scramble for solutions, recognizing all the while that solutions are going to be hard to come by.

"We're trying to deal with two polar opposite problems here," said Robert Kowit, an international bond fund manager with Federated Investors, as quoted by the December 13, 2007, Reuters report. "I would say (stagflation) is an increasing concern for most investors."

Frightened investors are sure to be more cautious with their money, which may spell more trouble for lenders and others that have become accustomed to being able to sell debt packaged as investment instruments – and those debts backing those are often mortgage debt and credit card debt – for the liquidity they need to keep the whole process merrily rolling along. Stagflation isn't the only thing that investors have to be scared of, not with billions of dollars of delinquencies and defaults hitting lenders, banks and credit card companies. Yet another set of factors having the potential to significantly slow growth.

With these developments in the economic situation, all eyes are on the US, as the world's nations know that they will not remain unaffected. After all, a huge percentage of the currency reserves of the world are held in the dollar, and already governments are seeing the value of those reserves ebb as the dollar struggles. As for the average citizen, the only thing left to do is to try to position personal finances in such a way that they can be as secure as possible, such as by taking active steps to reduce debt and increase savings by decreasing expenditures, in preparation for the challenging economic times to come during this period of fiscal correction and reorganization.