Stagflation is increasing unemployment and increasing inflation. The problem with stagflation is that the Fed can only address one (inflation or unemployment) by aggravating the other.

The August jobs report showed 130,000 jobs created (20,000 less than projected). In addition, the trend of the recent past is clear [2]: the rate of job growth is negative. While job growth rate has struggled to maintain for the last two years, the trend for this calendar year is a reduction in job growth.

This is especially notable because it takes approximately 130,000 jobs per month just to maintain the current unemployment rate. This can be seen in the unemployment rate over the same time period, which is approximately constant throughout this calendar year [1].

So it looks like unemployment is stagnant (and will be increasing if the trend continues). Let’s see how inflation is doing.

Core inflation [3] (which ignores energy, food real estate, and gold) rose to its highest annual rate in a year [4]. The current annual rate is 2.4%, 0.4% higher than the Fed’s goal of 2%. This is the highest it’s been in 11 years [5].

With high inflation, people take money out of cash or cash bearing investments and put them into real assets. Gold and real estate are examples of this type of asset.

The price of GLD (a holding company that does nothing more than buy and hold gold) has been increasing since January of 2016.

There has been a drop recently in the price of GLD (shown below). I think that this is accounting for the reduction in interest rates expected by the Federal Reserve this week. That reduction in interest rates will immediately send stock prices higher. So some people have transferred their assets from GLD into stocks, will profit on the upswing, and then transfer it back into GLD to profit from the long term inflation. (This is all speculation on my part.) Therefore, I expect this effect to be transient, and that the price of GLD will continue its rise soon.

Real Estate, which is not as liquid an asset as gold and doesn’t experience the high frequency perturbations, has increased as well. The median price of real estate has increased 3.1% this year (1.1% higher than the Fed’s target rate of 2%) [6], and has been steadily increasing since at least 2016.

Some on the Fed are voting opposite the Fed’s motion (i.e. there are now dissenting votes [12]). That is, the board of the Fed no longer unanimously agrees on whether inflation or unemployment should be addressed.

So there we are. We have had increasing unemployment and increasing inflation. As I predicted in “An Economic Projection” and “The Market: What’s Coming“, stagflation has arrived (though we’re currently in the very early stages). Anyone who took my advice to invest in gold has profited nicely.

That’s what has happened. Now let’s see what’s happening and what this is likely to lead to.

Much of the recent employment is in the service sector [6.1], and this is largely from The Gig Economy [7]. Rather than hiring a person as an employee (and having to pay social security and workman’s comp and all of the other requirements imposed on employers), companies have been hiring people as independent contractors and paying them per job. Whereas this avenue was restricted to large jobs in the past, the automation afforded by mobile phones and the internet has permitted this type of employment for small tasks. Uber, Lyft, Door Dash, and delivering for Amazon are examples of this type of employment. It lets the employers get around minimum wage and many other requirements; this has naturally led to increased employment. (Those who are unable to contribute enough to merit the minimum wage are now getting hired into this gig economy.)

The Gig Economy is taking some major blows. California has sent a bill to the governor requiring app-based companies to make their workers employees [8]. This will have two main consequences. 1) Immediately, this will lead to reduced employment in California (where currently 1 million people work in the gig economy). 2) The prices of gig services will increase dramatically and be less available. So there will be reduced production (we will not be purchasing gig services as much) and there will be fewer people employed. As one might expect, California is just the first of many states with this type of legislation in the works. Labor groups are pushing similar legislation in New York, Washington, and Oregon. This will lead to an increase in the rate of unemployment.

On the other side of the economy, countries are trying their hardest to reduce the value of their currency. As the consequences of past decisions catch up to us, governments are hoping to absorb some of the blow by shifting the burden onto other countries. They do this by reducing the value of their currency, which increases their exports (since their products are relatively cheaper) which increases employment and production in their home country. There is such an impetus to do this that major central banks around the world are reducing their interest rates to negative values (meaning they are paying banks to take the currency). This is unprecedented. Of course, there will be consequences to these actions, but they will come later. And “later” is as good as “never” to a politician with term limits, and populations with limited amounts of economic knowledge and short memories.

The Federal reserve will be cutting interest rates on Wednesday [9]. Trump has asked for much further reductions (to negative interest rates) [10]. China, in response to the reducing value of the dollar, manipulated its currency to further reduce the Yuan [11]. Central banks around are reducing interest rates [13], many going as far as reducing their interest rates to negative amounts [14]. All of this will lead to increased inflation.

In summary: we’re experiencing increasing unemployment and increasing inflation and our politicians are taking actions to increase unemployment and increase inflation. With ever increasing inflation (and exponentially increasing rates), it’s a race to the bottom.

This has all happened before. Before the Great Depression, there was the “roaring 20’s”, where artificially low interest rates led to great times (followed by payment for that irresponsibility). In 2006, prior to the great recession, there was the statement “Money has never been so cheap.” (Below is a video of Peter Schiff getting ridiculed for his accurate prediction of what eventually resulted.)

We’ve been through all of this before. We all know how it turned out.

[1] https://finance.yahoo.com/news/us-august-jobs-payrolls-report-213225200.html

[2] https://www.bls.gov/news.release/pdf/empsit.pdf#targetText=Total%20nonfarm%20payroll%20employment%20rose,workers%20for%20the%202020%20Census.

[3] https://www.bloomberg.com/news/articles/2019-09-12/u-s-core-inflation-picks-up-more-than-forecast-to-one-year-high

[4] https://www.reuters.com/article/us-usa-economy/us-core-inflation-firms-in-august-weekly-jobless-claims-fall-idUSKCN1VX1PA

[5] https://finance.yahoo.com/news/inflation-data-surge-shouldnt-derail-another-fed-rate-cut-economists-say-154526811.html

[6] https://www.nar.realtor/sites/default/files/documents/ehs-07-2019-overview-2019-08-21.pdf

[6.1] https://www.npr.org/2019/09/06/758066667/tepid-u-s-jobs-report-adds-to-economic-jitters

[7] https://www.nytimes.com/2019/09/15/upshot/gig-economy-limits-labor-market-uber-california.html

[8] https://www.nytimes.com/2019/09/11/technology/california-gig-economy-bill.html

[9] https://www.cnn.com/2019/09/15/investing/stocks-week-ahead/index.html

[10] https://www.barrons.com/articles/trump-ignores-the-downsides-of-negative-interest-rates-51568280604

[11] https://www.nytimes.com/2019/08/06/business/economy/china-currency-manipulator.html

[12] https://www.bloomberg.com/news/articles/2019-06-19/powell-s-st-louis-arch-critic-provides-first-policy-dissent

[13] https://www.nytimes.com/2019/08/15/business/economy/central-bank-rate-cuts.html

[14] https://www.bloomberg.com/opinion/articles/2019-09-13/negative-rates-threaten-health-of-banks