The coming crash of the U.S. economy

Inflation, credit crunch and resurgence of the banking crisis

Issues contributed:

• Credit crunch is well on its way in the U.S.

• The U.S. regional banking sector is likely to receive a mortal hit from the ongoing ‘Realestatepocalypse’.

• The Global Financial Crisis 2.0 is (very) likely to re-emerge in the coming months.

The much awaited inflation figures came out on the 12th. The annualized growth rate of the headline CPI fell to 5%, but the growth rate of core inflation, stripping out food and energy, hastened to 5.6%. Majority of the increase was driven by transportation, shelter and medical care. This is not a good sign for two reasons.

First, because the hastening growth of the ‘core’ indicates that inflation expectations have anchored to a higher level and bringing them down is likely to requires some serious pain. Secondly, often times, since at least early 1970, when core inflation has re-accelerated after the CPI growth has peaked, also CPI has returned to an accelerating growth-trend within few months. This is not an ironclad rule, but definitely something to keep an eye on.

The members of the Federal Open Market Committee (FOMC) have probably heed the lessons of the 1970’s, when the Fed eased on the ‘throttle’ of interest rates rises too early and let inflation to pick up. Therefore, it’s likely that the FOMC does not welcome the re-acceleration (albeit small) of the growth of core inflation. This implies that rate rises will continue. However, the much-speculated credit crunch has begun, which can affect their decision.

Into the deep