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U.S. stock tumble as ‘stagflation’ fears take hold

Biggest one-day drop since 2020
By Masao Suzuki |
April 24, 2022
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San José, CA - On Friday, April 22, U.S. stocks fell more than 2.5%, with the Dow Jones Industry Average, dropping almost 1000 points. This led to the third week of losses for U.S. stocks, as a combination of recession fears - based on slowing corporate sales and profits, combined with the reality of higher interest rates - influenced investors.

The biggest news this past week was a more than 30% drop in Netflix stock prices on Wednesday following their report of losing 200,000 subscribers, after a prediction of a large gain. But was not highlighted in the news was that Netflix lost 700,000 subscribers after pulling out of Russia as part of the U.S.-orchestrated economic war on Russia.

While the news details economic difficulties in Russia, little is said about the growing costs to the U.S. economy, including higher costs of gasoline. While Russia only provided about 2% of the U.S. oil supply, oil is very price inelastic, meaning that a small change in the quantity can cause a large change in prices. With the elasticity of demand for oil estimated as low as 0.05, a 2% drop in supply caused by U.S. sanctions on Russia could lead to a 40% rise in price. In fact, U.S. oil prices spiked 35% after the start of the war in Ukraine, leading to higher gasoline prices.

Netflix was one of the so-called “pandemic” stocks that rose in 2020 with the widespread stay-at-home orders. The stocks of other businesses such as exercise machine company Peloton, and online videoconferencing company Zoom have also been falling after huge price spikes in 2020. Other businesses whose stocks rose during the rapid expansion in 2021, such as online used car company Carvana and Domino’s Pizza, have also seen their stocks fall and their sales and profits slow.

But a broader range of stocks are being hit by slowing sales and profits. Verizon, the largest cell-phone service provider, was one stock hit by slowing sales and revenue showing an economic slowdown. Other companies, such a for-profit hospital chain HCA, are seeing their profits squeezed by higher cost as inflation spreads through the economy.

The 40-year high in consumer inflation that is now more than 8% is prompting the Federal Reserve to speed up their increases in interest rates. While the Fed only raised short-term interest rates by one-quarter of one percent at their last meeting, longer term interest rates are rising quickly, from 3.5% at the beginning of the year to over 5% now. This will start to slow the red hot housing market, and then new home construction, which is one of the major triggers for a recession.

A fundamental problem with the U.S. economy is that it is showing signs of a broad-based slowdown, or stagnation, which is typical of a monopoly capitalist economy. This slowdown is most clearly seen in the case of Japan, whose economy as grown at a less than 1% rate per year for the last 30 years. The same is true for the eurozone in Europe since the financial crisis almost 15 years ago.

On the other hand, the United States economy has grown much faster than Japan’s or Europe’s, at a 2.5% rate over the last 30 years. But the faster rate of U.S. growth has been held up by lower and lower interest rates. When interest rates are adjusted for inflation, or what economists call the real interest rates, U.S. interest rates have dropped from about 7.5%, to under 1% over the last 40 years.

The U.S. economy has also been supported by growing doses of federal government deficit spending. The total debt of the federal government, as compared to the size of the U.S. economy as measured by Gross Domestic Product, has risen from 30% 40 years ago to more than 120% today.

With both the Federal Reserve pledging to raise interest rates to slow the economy to try to bring down inflation, and the Biden administration now saying that deficit spending needs to fall, a slowdown in the economy is very likely. At the same time, with much of the inflation being caused by supply side-factors, increases in prices are going to continue. This combination of higher unemployment and high inflation, or stagflation, hasn’t been seen since the 1970s.

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