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Summer vocabulary: Stagflation

Intermixed with all the usual words of summer—bikini, barbeque, beach, sunscreen—there are some new terms this year. They include “staycation,” a vacation where you stay at home or nearby to save money, and “stagflation,” one we haven’t heard in a while, and which may leave you wondering what exactly it means.

 

It’s funny, to pick our weekly topic we run ideas by people—friends and colleagues—to determine if it’s interesting or relevant or neither. When it came to stagflation, we got a lot of quizzical looks and yes, it is a real word, and it’s a bit scary.

Stag + flation
You’re probably familiar with inflation (when the cost of goods rises and the dollar doesn’t go as far as it used to). Then, take “stag” and think stagnant, or stagnation. Combine them and you’ll have the meaning of stagflation—when the cost of goods rise and the economy fails to grow. It’s an economic state that tends to occur when oil prices and unemployment rates are high.

The last time the United States saw stagflation was back in the 1970s.

Why you’ll hear more about it

About every six weeks the Federal Reserve takes a pulse of the economy by asking its 12 regional banks to survey businesses in their region. The latest of these surveys, known as the Beige Book, came out on Wednesday and said the economy is slowing and prices are rising. Some smelled stagflation.

 

The big picture

The Fed says although it’s not concerned about stagflation, it is worried about good old-fashioned inflation. Next week we’ll get the first read of second quarter GDP, which will tell us how much the economy grew between April and June. It’s expected to show slight growth. Unemployment so far is holding relatively steady but seems to be the big wild card. If it climbs and people can’t keep up with rising costs, they won’t be traveling or going to restaurants, all things that fuel the economy. And therein lies the fear of stagflation for some economists: If it goes on long enough it can lead to a recession, another economic state that everyone hopes to avoid, when the economy shrinks, people lose their jobs, and so on.

 

Here are some tips for wading through stagflation.

Here’s more on what it might mean for you.

Fannie & Freddie explained

As Fannie and Freddie headlines dominate, if you find your self still scratching your head over what it’s all about (we were), here’s a primer, DIVA-style: short and snappy.

What happened?
Financial markets and investors shuddered as a New York Times story revealed the nation’s two largest mortgage supporters—Fannie Mae and Freddie Mac—were under “growing financial stress.” Last Sunday the U.S. Treasury was ready with $300 billion  to shore them up if needed. This gesture reassured the markets.

Why were they in trouble?
Think of this like a game of hot potato—when the music stops, the person holding the potato loses. In this case, the potato is debt.

Fannie and Freddie (these are nicknames) are mandated by Congress to make it easier for banks and lenders to make loans to home buyers. They do this by buying loans made by banks and taking on all associated risk if the loans aren’t paid back. The bank is off the hook and has the cash to make more loans (and money).

To cash flow themselves and make money, Fannie and Freddie bundle up the loans into different assets that they sell off to other financial institutions. But, and this is a big but, they also guarantee the underlying loans will be repaid. If they aren’t Fannie and Freddie, are left holding the hot potato.

If their risk exposure gets too big, they may not be able to buy loans from banks (their role), thus paralyzing the home loan market. The best explanation of their risk exposure and how it has ballooned is here in this NYT graphic.

Congress founded Fannie but it’s not a government entity
Congress chartered Fannie in 1938 as part of The New Deal to encourage banks to lend to borrowers who may have been considered credit risky. It went public in 1968, and Freddie (also public) launched in 1971 to keep Fannie from becoming a monopoly.

In an odd hybrid relationship, these two publicly held private corporations are government regulated and operate with the perception that the government will always have their backs, which in fact is not guaranteed. They have responsibility to the nation and also to make money for their shareholders, creating a tense dynamic.

The big picture
Together Fannie and Freddie own a staggering amount of mortgages—about $5 trillion. Over time their risk exposure has grown as the number of loans grew and the number of mortgage defaults skyrocketed. Fannie and Freddie say they are in good shape but in a rough patch. Just the chance, however, that these two entities could collapse sent the shudder—without them mortgage rates would spike and home prices, already off about 20% in the last year in many markets, could fall. Their like an important engine keeping the housing market rolling whose health is important to the stability of the markets. Problem is, they may have become too important and now you’ll probably see lots of politicians calling for more government oversight of these two giants.

Sisterly love

As Americans participate in traditional Fourth of July activities this holiday weekend, another tradition unfolds across the Atlantic: sisters Venus and Serena Williams will again make their way to Center Court at Wimbledon on Saturday to battle for the championship. It’s the third time they’ll meet against each other for the championship, and certainly a match to enjoy with the traditional Wimbledon snack, strawberries and cream—and maybe a burger from the grill.

 

Promoting American Tennis

The Williams sisters’ on-court rivalry has done a lot to promote American tennis, especially since the Russians and Serbs have claimed the top five women’s spots in 2008. In fact there are just eight American women ranked in the top 100. Serena ranks 6th in the world, while Venus ranks 7^th, but Venus is also the 2007 defending Wimbledon champion. To earn her place in the finals, Serena beat Zheng Jie from China, the first Asian woman to make it to the semi-final round at a Grand Slam tennis competition.

 

Off the court the sisters influence the game in other ways—both sisters run their own design companies. Venus specializes in interior design and Serena runs a clothing company.

 

Women and Tennis

The first Lawn Tennis Championship was held in 1877 at the All England Club Croquet and Lawn Tennis Club in Wimbledon, England. Originally a host to Gentlemen’s Singles, the private club opened up the championship to Ladies’ Singles in 1884. Interestingly, two other sisters, Maud and Lillian Watson, played against each other in white corsets and petticoats at the 1884 finals.

 

In general, tennis has been good to women when it comes to equal pay, thanks in large part to the efforts by pioneer Billie Jean King. She raised interest in women’s tennis when she defeated Bobby Riggs, a tennis star and showman who claimed the female game was inferior in what was promoted as The Battle of the Sexes in 1973. Wimbledon, however, was the last championship tournament to offer equal pay for women’s finals—it began doing so just last year.

 

The Big Picture

While most sports watching on holidays such as Thanksgiving and New Year’s are dominated by all male sports, it’s refreshing to see two women take center stage as we celebrate our nation’s independence. Good luck to Venus and Serena this weekend and Happy Fourth of July!