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May 28, 2009 / Toby Dayton

Jim Grant Sees Dark Inflation Clouds Ahead

I had the great pleasure of hearing Jim Grant of Grant’s Interest Rate Observer speak at a conference last week. In his incredibly entertaining, enlightening, and frightening remarks, he noted that in the previous 10 post-war recessions, the peak-to-trough decline in GDP averaged 1.7%. The average stimulus response during those 10 recessions averaged 2.9% of GDP.

In this current ‘Great Recession,’ the decline in GDP has been only 1.8% to date, and the stimulus response so far has been equal to 29% of GDP. This is 10 times the normal stimulus for a recession that so far is just slightly above average in terms of GDP decline. As a result, Grant is forecasting massive inflation sooner and to a significantly larger degree than mainstream economists are predicting at the moment.

At the same conference, other economists made some interesting remarks about unemployment figures. The first was that in the 5 months between November and March, the average monthly job losses have exceeded 600,000. In April, the job losses were 539,000 and everyone cheered the positive news and claimed that the worst of the recessions was over. While that may be the case, in neither of the past 2 receessions was there ever a single month where job losses were greater than 300,000.

The other point that was made was that even once the economy starts adding jobs, whenever that might occur, the pace of net job gains initially will not be enough to surpass the number of new entrants into the job market. This means that even once there are months with jobs being added in the economy, the unemployment rate will continue to rise until monthly job gais outpace the growth of the labor market. Kind of frightening to think about.

Sorry for the grim post but the stats and information are worth keeping in mind as the economy muddles through into a recovery at some point.