What happens to the economy between now and 2012? How can stagnation and inflation finally bring deflation and depression?
Joe Weinman
Jun. 21, 2007

Right now the economy faces a high tail wind of stagflation. The real estate trouble and mortgage defaults are stagnating the economy. At the same time commodity inflation and wage inflation have started creeping into the system.

What happens to the economy between now and 2012? The economy will face severe stagflation between now and 2010. The long-term rates will cross 12% while the short-term rates will fall slowly as the Fed is forced to cut the rates as the economy starts registering mildly negative GDP growth. The inflation (core and headline) will be above 7 to 8% by end of 2009. The stock market will move slowly lower towards 1200 in S&P 500 index.

The Fed will lower the short-term rates in 2008 – the election year. This will actually accelerate the inflation and the route in long bonds. The stock market will accelerate downwards.

Something interesting will happen in 2010-2012 time frames. The stagnation in economy will change to deep depression due to debt burden among common people and business entities. Businesses as well as the common people (middle class) will not be able to service their mortgage, car loans, credit car loans, and so on. The bankruptcy, foreclosures, and mortgage defaults will skyrocket by end of 2010.

The economy at that stage will get depressed. The GDP contraction will range between –1.5% and 5%. The depression will start. The inflation will suddenly change into deflation.

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