Open Thread: The Return of Stagflation?
From the front page of tomorrow's WSJ, comes this charming article:
"The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about "stagflation," a condition not seen since the 1970s.
Inflation is rising. Yesterday the Labor Department said consumer prices in the U.S. jumped 0.4% in January and are up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up by 2.5% from the previous year, a 10-month high.
The same day brought news that sparked worries of a deepening recession. The Federal Reserve disclosed that its policymakers lowered their forecast for economic growth this year to between 1.3% and 2%, half a percentage point below the level of their previous forecast, in October. They blamed a further intensification on the slump in housing prices, tighter lending standards and higher oil prices. They warned that should the economy's performance differ from its revised forecast, it would be more likely to fall short than outperform."
Of course, none of this is news to any one who has been paying attention (i.e., regular TBP readers). Over the past few years, we have taken to calling the current condition demi-stagflation. Not nearly as bad as the 1970s, but certainly worrisome enough.
The Journal also asked readers: Is the U.S. in a period of stagflation? I found the poll results surprising: Its a full 180 from what we had been hearing from the politicos and pundits: We went from a rather robust denial of inflation, and steadfast defense of growth, to this:
(Let's see if this changes when more votes come in . . .)
>
Tonite's open thread question: Is Stagflation really back? How much worse is it going to get? Will it be anything like the 1970s (only without the polyester and disco)?
What say ye?
>
Source:
Fears of Stagflation Return As Price Increases Gain Pace
Fed Cuts Outlook For Economic Growth As Credit Tightens
GREG IP
WSJ, February 21, 2008
http://online.wsj.com/article/SB120355396795281551.html
Wednesday, February 20, 2008 | 08:50 PM | Permalink
| Comments (51)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00e5505c93e88833
Listed below are links to weblogs that reference Open Thread: The Return of Stagflation?:
Comments
the disco would be a plus. line-dancing may be the only way we make it through the next few years
Posted by: scorpio | Feb 20, 2008 9:03:55 PM
HA!
I'm gonna cut the Hunt brothers off at the pass and buy up silver now....
That and wheat!
Posted by: Chief Tomahawk | Feb 20, 2008 9:07:20 PM
As coined by other posters (or elsewhere on the net), I expect it to remain "biflation": wages go down or stay the same (in the US) while necessities increase in price.
At some point, perhaps after a few years, wages will start rising. At that point, we'll raise rates.
On the one hand, it seems unfair that -- after creating/contributing to a bubble benefiting speculators and Wall Street -- the only "inflation" the Fed cares about is wage inflation. On the other, since one of their mandates is "help the economy grow (to the extent of its capacity for growth, which in part is limited by "available labor"), then it makes sense to ease credit to promote growth in the presence of weakening employment. And vice versa.
As necessities grow more expensive, some labor (and capital) will be diverted to produce more. (E.g., higher grain and gold prices indeed spurs more production, perhaps using the labor and capital from recent casualties like mortgage brokerages and The Sharper Image.)
Posted by: wunsacon | Feb 20, 2008 9:10:51 PM
Commodities could be getting bid-up in excess of what dollar devaluation would justify, which means we're watching a footrace between the market's perception of inflation and its recognition of the productive downturn we're clearly entering.
Demand dynamics don't justify the run-up in oil, but it will take a while for recession to drag down demand.
Posted by: j-daddy | Feb 20, 2008 9:22:30 PM
Good news...the US Gov't can't afford to continue the economic indicator service but the Shadow Gov't Website can.
Posted by: Steve Barry | Feb 20, 2008 9:28:06 PM
I'm not economist by any means but I'm scared as hell of the rising cost of imports, via the shrinking dollar, and rising unemployment. I think it could really be a reinforcing cycle where we're all in trouble...
(Disclaimer: I've always been a bit paranoid!:))
Posted by: nades | Feb 20, 2008 9:33:29 PM
There's the potential for developing stagflation, but you'll know it when it happens... and it ain't yet happened.
It's like sin. Everybody knows what it is.
Posted by: Eclectic | Feb 20, 2008 9:35:46 PM
Stagflation like we've not seen before is coming to America.
Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is.
Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse.
The US has been the main culprit behind the destabilising global imbalances of recent years and its massive current account deficit absorbs about 75 per cent of the world’s surplus saving
Combine this with the cost of Bush to America since 2000 which is $32 Trillion dollars in total liabilities and unfunded commitments for future payments.
The implications....
GAO Comptroller General David Walker who recently resigned.
"If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and some people would be talking about whether the company’s management directors needed a major shake-up".
“The federal government’s total liabilities,” Walker explained, “translates into a de facto mortgage of about $455,000 for every American household and there’s no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.”
Posted by: km4 | Feb 20, 2008 9:38:50 PM
$110 oil ?
Posted by: Douglas Watts | Feb 20, 2008 9:48:07 PM
America is facing massive retrenchment AND inflation, not stagflation.
Social turbulence is an inevitable byproduct.
Buckle up.
Posted by: Paul Jones | Feb 20, 2008 9:49:17 PM
It sure will be a different kind of stagflation. Now there's a much less unionized (weaker) workforce, and the inflation formula was changed, resulting in lower reported #'s. That's the "flation" part.
As for the "stag" part, how cyclical is a service economy compared to the producing one we had back then?
Posted by: P. K. | Feb 20, 2008 9:49:46 PM
The problem with polls like this is that it only appeals to people that read your blog and in most cases agree with you - which automatically introduces a bias in the results (its like the American family association kicking out a poll about gays).
Here is my perspective on all this - I survived the 70s, I survived the 80s, I survived the 90s, I have so far survived this century ... so let me ask you in all seriousness: what the fuck do I care about stagflation now? In ten years - I will be reminiscing about this. You will still be pissed off at Best Buy.
Posted by: yoshi | Feb 20, 2008 10:06:56 PM
2+Billion people are in the process of industrialization...The FED has dropped and dropped and dropped rates AND cranked the printing presses for years...
Huge demand for limited supply of goods...while we are debasing our currency/economy...
The real surprise is that there is someone out there what is surprised by this!
Save yourself 'cause Boom Boom can't!
Posted by: MrMarket | Feb 20, 2008 10:14:20 PM
a guy named Chris Farrel penned a book called Deflation a few years ago. It's a good primer. The book suggests you look at where the inflation is living in the economy and where deflation is developing. By that perspective, and it makes sense, deflation will eventually overpower the inflationary dynamics in commodities. It's hard to see right now if you just shop for food regularly but it is not hard to imagine if you appreciate just how much leverage carry trades levitated all of our perspectives by and just how fast it could all unwind if the Fed's unusual measures do not reverse the trend in risk aversion. This could easily take a while to manifest but even if it does take a year or even two, the pain in the meantime will be terrible.
The part that really concerns me is when I look at how Japan's deflationary mess was mitigated by foreign demand. I do not think we will have that luxury in any way that is comparable.
Posted by: Dave M | Feb 20, 2008 10:21:29 PM
Having lived through the 70's bought with stagflation.
Back then...
It starts slowly. In '69, I was walking to class as a freshman. The explosiveness of increases in input prices and wages was dawning on me. It's not just simple linear arithmetic.
Things build. Catching up to past inflation is on your mind while you're also trying to build in cushions against expected price increases.
Relationships get distorted, inventory builds as stockpiles are built to forestall the effects of future price increases - defensive buying.
Needs and wants are questioned - "I can't believe they think people will pay that much"
House prices were inflating - people were coveting that appreciation in the 70's.
Fundamental state changes occurred - two oil embargoes shocked the system. The dollar gold peg was disavowed.
Jimmy Carter said we'd have to get by on less.
The US was a creditor nation.
Now ...
What will be the fundamental shocks? Monetary disorder. Peak oil. Gold becomes money again. The forever war.
Housing is deflating.
Again the Fed is exacerbating the onset of inflation, by cutting interest rates, Arthur Burns deja vu.
Wages aren't increasing. My rent is $900 higher but my salary is the same as in 2000.
The Chinese stockpile commodities to forestall the effects of price increases.
The US is a debtor nation.
Posted by: sanjosie | Feb 20, 2008 10:35:12 PM
Can we just put the shadow government in charge already? I've seen more good ideas about what to do from the bloggers than from anyone "in charge".
Seriously.
Posted by: donna | Feb 20, 2008 10:39:24 PM
Anybody else notice how noisy the inflation data becomes after 2003?
Posted by: DMR | Feb 20, 2008 10:40:24 PM
I wonder why the inflation number was big news. Did people not know that food and energy was higher?
One of two things is going to happen: oil is going to go so high and cause a recession which will lead to lower oil prices. Or lower oil prices will head off a recession. Either way, inflation is not going to be a problem.
It amazes me that home prices climbed and were never figured into inflation, and now they fall, and that figures in as well.
To me, the big story has been asset deflation not inflation. Lower demand can lead to lower prices, and the U.S. just like Japan is getting much older. Not one economist has figured this out yet.
Posted by: jz | Feb 20, 2008 10:41:15 PM
Oh, and what's different is in the 70s we had this thing called SAVINGS.
Sure, we were pissed that they were worth less and less, but it helped. Now? I'm watching friends not be able to pay their rent and car payments, and not being able to find work. I'm watching lots of kids moving back home with their parents AND watching CA's governor cutting education just when these kids have no jobs. What do they expect the kids to DO, anyway?!
Posted by: donna | Feb 20, 2008 10:47:14 PM
Chief Tomahawk,
thats not funny, I was long silver with the Hunt Bros. at the time and had my ass handed to me when they bailed. I barely had enough money to open another margin account.
Posted by: Street Creds | Feb 20, 2008 10:50:23 PM
After many years of excess consumption, using borrowed money, we now need to repay our global debts.
The Fed must rapidly lower interest rates, the dollar will fall, prices of imports and global commodities will rise, less will be consumed & what is consumed will be domestic where possible, and more of what we grow, mine & make will be for export. At this point there is no alternative but to muddle through the next decade while we unwind the imbalances in our economy.
Even if the economy as a whole grows, it will feel like a recession to the average consumer whose living standards will be lowered.
On the other hand, if you are a wheat farmer in Nebraska......
Posted by: bsneath | Feb 20, 2008 10:54:53 PM
I think saying inflation is "not nearly as bad" as the 70's is misleading. If this current methodology was used in the 70's, CPI would probably only be running in the 4-6% range.
The only difference we have now is that instead of all prices rising at relatively the same time, we have super bubbles that are simply cycling from one thing to the other.
I can't believe this point isn't brought up every time someone says this is not like the 70's. Housing inflation is/was much worse than the 70's. Oil is now comparable and most other items of need are closing in. I have a feeling gold will be there before we know it as well.
Posted by: Sammy20 | Feb 20, 2008 11:05:39 PM
Concern about stagflation is off the mark.
There is just no comparing the current amount of debt at all levels with the debt ratios that existed in the 1970's. If debt/leverage continues to unwind at the current pace or faster, we will be very lucky if stagflation is our top concern a year from now.
Posted by: Tom Durff | Feb 20, 2008 11:12:30 PM
“The federal government’s total liabilities,” Walker explained, “translates into a de facto mortgage of about $455,000 for every American household and there’s no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.”
Posted by: km4 | Feb 20, 2008 9:38:50 PM
____
I think there’s a word for that...
Posted by: Marcus Aurelius | Feb 20, 2008 11:40:53 PM
Re Dave M's comment: the Fed's very efforts to reverse the trend in risk aversion are contributing to the risk aversion.
The equity markets are taking heart from the easing, but the high yield market is shut down and the bank debt market is getting worse by the day.
Posted by: j-daddy | Feb 20, 2008 11:42:20 PM
