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The Smell of Stagflation

March 20, 2013 – 5:15 pm

chinastockmarket460India cut their interest rate by a quarter point to 7.5%. For us that would be an insanely high interest rate as our central bank stands at almost zero percent. So why such a high rate and why the cut for India?

The answers are simple. First, they have a high rate because inflation is running at well above the official acceptable pace of 4% to 6%. They are trying to squash inflation and are having a great deal of difficulty in doing so. That explains the high interest rate but not the cut in the rate. That too is simple: in the most recent quarter, growth has slowed to 4.5%, the slowest pace in 15 months. Not long ago it was almost twice that rate.

India is between a rock and a hard place. They want to spur growth but not fan the flames of inflation. Why do I feel the U.S. might fall into that same hard place in the not too distant future. Will our Fed have to raise rates to head off inflation and when it does will that slow economic growth? Rising rates usually retards growth as it did in India. Then if that happens how do you spur growth if not by lowering interest rates?

India is suffering ‘stagflation’, yes they are still growing and true stagflation is no growth with inflation, but it still feels, smells, and acts like stagflation. How close are we to that possibility?

Good Trading
Steve Peasley

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