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TheStreet Open House

U.S. Headed for Stagflation

NEW YORK ( TheStreet) -- In April, the IMF lowered growth estimates for every industrial economy except Japan, where Abenomics (essentially, monetary and fiscal policies even more stimulative than those of the U.S.) was being praised as a godsend after more than 20 years of deflation.

Since then, markets in Japan have been having second thoughts as to the effectiveness of Abenomics, and, as of June 21, the Nikkei had fallen by more than 15% from its peak on May 22. Europe remains in severe recession, and the BRICS (Brazil, Russia, India, China and South Africa) are experiencing significantly slower growth.

Slow Growth in the BRICS

The IMF assigned an 8% growth rate to China. But all of the ancillary indicators (falling Australian commodity exports, excess shipping capacity in the region, and low and falling commodity prices including copper) portray an economy with much slower growth.

On Friday, in a Bloomberg TV interview, Marc Faber (of GloomBoomDoom.com) remarked that China's growth rate was, at maximum, 4%. Remember, China has been the world's economic growth engine for the past five years.

In Brazil, there are protests over falling living standards. According to BCA research, protestors are "demanding everything from lower bus fares and less corruption to a new political system." BCA indicates that the government misdiagnosed the economy's growth capacity (i.e., supply side economics). They followed stimulative U.S. type fiscal and monetary policies that failed to stimulate economic growth, but did manage to stimulate a significant level of inflation.

Nearing the End Game

As a result, it isn't any wonder that top-line revenue growth in the multinational corporations has stalled. That, and the market-induced backup in interest rates since the end of May, can't be good for near-term economic growth. It is really hard to come to any other conclusion except that we are bearing witness to the failure of Keynesian demand side fiscal and monetary stimulus? As of the end of last week (June 21), the uncertainty as to how this will all end was quite evident in all of the trading markets. So, how will it end?

Is Brazil the Model?

Let me suggest that Brazil could be the model. In the U.S., there is growing evidence that, despite a 7.6% U3 unemployment rate, labor markets are tight.

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