Gobs of new debt on the books of the U.S. government and Corporate America — coupled with an extended period of low interest rates from the Federal Reserve — could mean only one thing in the post COVID-19 economy, said Grant’s Interest Rate Observer founder James Grant.
“I think we’re looking at the near-term prospect of stagflation,” the closely followed Grant said on Yahoo Finance’s The First Trade. “I can’t help but wonder what in the world do people see? People seem kind of ducky in the world and things are sub-ducky at the moment. In my mind, it’s a closed book.”
Grant continued, “I would expect we’re looking at a world of very slow recovery. I wish it were otherwise. It may well be, but it seems to me that we’re looking at a fairly slow recovery and a gruesome profit picture and a lot of debt, and macroeconomic figures we have not only never seen but heretofore never imagined.”
‘Idea of sound finance is kind of out the window’
Stagflation is technically defined as persistent high inflation coupled with high unemployment and a stagnant economy. The term rose to fame in the late 1970s when surging oil prices spurred rampant inflation and unemployment in the United States. The Fed — led by inflation busting chairman Paul Volcker — had to raise interest rates to stomp out inflation, which only hurt the economy more.
While few would argue the U.S. economy is seeing inflation right now amid the COVID-19 pandemic that has brought American business to its knees, we have entered a period of stagnant growth and exploding joblessness. The April non-farm payrolls report due out this Friday is expected to show at least 25 million people lost their jobs in the month. Personal spending has plunged, while personal savings have spiked.
Ultimately, the final piece to Grant’s stagflation equation could come soon as the economy begins to reopen. Armed with low rates from the Fed, consumers and businesses may be apt to spend aggressively after being quarantined for a while. That would push up consumer prices at the same time unemployment remains high and growth likely negative.
This is not a favorable backdrop for stocks, experts argue.
Said Grant, “The idea of sound finance is kind of out the window, and in its place is the monetary theory of financial finesse which is OK as long as it works.”