In April 2007, LEAP anticipated: The return of stagflation: Towards a US growth falling beneath 1 percent by this summer

Inflation combined to a decreasing consumer spending (1) accounting for two thirds of the US growth these past few years, and no new « growth engine » in sight (2) : this is called stagflation. Last summer 2006, LEAP/E2020 anticipated that the US economy was probably going in this direction. Today, all the gathered elements enable to say that stagflation has settled in the US. The outfalls of the subprime crisis contagion to all consumption sectors will bring the US growth rate down to less than 1 percent by summer 2007.

In parallel, due to the fall of the US dollar against the currencies of its main European and Asian trade partners, due to the relentless fall of US productivity and to excess liquidity in the past years, contrary to what the Fed hopes, there is no reason why inflation should reduce by itself. But, due to the direct risks conveyed by the beginning recession and its stock and financial markets outfall, weighing over all the leaders surrounding the Fed’s decisions (government, banking and financial institutions, US elites whose earnings now depend on stock markets and corporate profits), LEAP/E2020 considers that US central bankers will implement a new drop in rates before the end of Spring 2007. As previously anticipated in GEAB, they will then (during the second quarter of 2007) overturn their decision once it is clear that it has not resulted in any significant economic outcome but a new slump for the US dollar.

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Notes :

(1) Source: “Higher inflation, weaker spending in February”, MarketWatch/DowJones, 03/30/2007

(2) Source: “Durable goods data and investment data point to US hard landing in 2007”, RGE Monitor, 03/28/2007