In a recent interview, former U.S. Federal Reserve Chairman Alan Greenspan (the "Maestro") warned that the economy was experiencing, "the early signs of stagflation." This is a very rare occasion where Mr. Greenspan and I are actually in agreement.
In fact, the U.S. economy—and indeed the entire developed world—is in the beginning stages of an unprecedented breakout of stagflation. The number one reason for this can be summed up in a single word…debt. Debt not only steers an economy towards low growth but it also mires the nation with inflation.
Global debt increased to more than $200 trillion, nearly three times the size of the entire global economy, and that number is from 2014, the most recent available. All this debt engenders the stag part of stagflation because it is difficult to grow and invest for growth in an economy under such high debt burdens. The baneful part of this worldwide debt buildup is that it didn't lead to the accumulation of capital goods for the purpose of expanding productivity. Instead, it was spawned for the fruitless Keynesian ruse of what amounts to not much more than hole digging and filling.
While it is true that debt service payments are currently at historic lows, it is also true that debt levels are at a record high both in nominal terms and as a percentage of the economy. Therefore, low-interest payments are the direct result of an unprecedented bubble in the bond market. Individuals are intuitively aware of this unstable rate environment and must prepare their balance sheets for rising carry costs.
Most importantly, a debt saturated economy can't function properly because it is marred by capital imbalances and asset bubbles that must be unwound for the credit and savings channel to work efficiently. But our economic leaders seem intent on obduracy.
A perfect example of this condition is Japan. Despite multiple recessions and lost decades, the government is still clinging to the deluded fantasy that a debt to GDP ratio greater than 240 percent is needed to jump start the economy.