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U.S. Headed for Stagflation

There are growing job openings and a mismatch of needed skills, falling new weekly claims for unemployment insurance and rising voluntary quits. Besides the tight labor market, for the past five years, firms have been unwilling to reinvest in themselves, choosing instead to hoard large volumes of cash.

As a result, capacity issues could constrain the rate of expansion of real physical output. David Rosenberg, of Gluskin-Sheff, indicates that he believes that noninflationary potential economic growth in the U.S. is between 1% and 2%, as opposed to the 4% view held by those who control economic policies. If correct, the U.S. is currently at or even above its noninflationary growth rate.

The Inflation Recognition Problem

Furthermore, due to the adoption of twisted logic that now welcomes inflation, early warning signs are likely to either be ignored or praised. Inflation is a lagging indicator, which compounds the recognition problem. Over the past year, while the core inflation rate in goods (CPI) has been -0.2%, the inflation in the dominant service sector has been 2.3%. We should recognize that there are measurement issues that bias these inflation measures to the downside.

Conclusion

One logical conclusion for the U.S. is that current monetary and fiscal policies, which are aimed at demand stimulation rather than supply-side capacity issues, could result in today's Brazilian style stagflation.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Robert Barone is a partner, economist and portfolio manager at Universal Value Advisors, an investment advisory firm in Reno, NV.

He previously held positions as an economist for Cleveland Trust Company and as professor of finance at the University of Nevada. During his tenure at Comstock Bancorp in 1996 he became a Director of the Federal Home Loan Bank of San Francisco, serving as its Chair in 2004.

Barone also served as Director of AAA of Northern California, Nevada and Utah and a Director of its associated insurance company. He currently serves on AAA's Finance and Investment Committee. Along with his son Joshua, he founded Adagio Trust Company in 2000, and in 2006 opened Ancora West Advisors. Barone received a Ph.D. in Economics from Georgetown University.

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