# Stagflation is now the word heard on the floors



## JPC (21 February 2008)

Stagflation is now the word heard on the floors of Wall Street that is putting fears in investors mind. This particular economic condition is generally characterized by slow growth, rapidly rising consumer prices, and relatively high unemployment, which for now is not happening in US. Stagflation occurs when the economy isn't growing but on the other hand there is a high unemployment (stagnation) while prices rise (inflation). This happened to a great extent during the 1970s, when world oil prices rose dramatically, fuelling sharp inflation in developed countries. From my point of view, the current high prices of commodities may put this economic condition in action. In addition, early this morning, the government reported that consumer prices in country rose more than forecast last month, indicating that the slowing American economy isn't alleviating inflation pressures. The 0.4 percent rise in consumer prices was led by increases in the prices of food, energy and health care. Now, the FED has a big problem in their hands, slow grow with high inflation. I don't know but this is not good, as I said before, we may be living a problem of stagflation. Keep your eyes well open, and play on the defensive side. 

Original by AC Investor Blog


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## Lucky_Country (21 February 2008)

And how do governments deal with stagflation. 
Higher interest rates wont help grow the economy.
Lower interest rates would help inflation.
Answers please ?


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## MRC & Co (21 February 2008)

Lucky_Country said:


> And how do governments deal with stagflation.
> Higher interest rates wont help grow the economy.
> Lower interest rates would help inflation.
> Answers please ?




ha ha, you just answered your own question!

There is no answer!  That is why staglfation is the ULTIMATE fear of economists!  Even a liquidity trap (such as in Japan) has possible solutions, stagflation leaves you caught in a catch 22!  

I thought this may happen from the start and if it eventuates, we have a HUGE problem!  

However, the "invisible hand" will somewhat aleviate the problem.  In that low economic growth, will push down demand for goods and services (in this case, a large problem being oil prices), which will push down the price of oil and hence help fight the inflation problem.  

Many markets and flow on effects in economics work like this and is one of the beauties of relatively open markets.


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## wayneL (21 February 2008)

Lucky_Country said:


> And how do governments deal with stagflation.
> Higher interest rates wont help grow the economy.
> Lower interest rates would help inflation.
> Answers please ?



This is the problem with modern economic theory, the presumption that recession can & should be avoided by pulling various economic levers.

It's Balderdash.

The Austrian theory proves itself right time after time, viz, recession necessarily follows a boom to clear out malinvestment and "reset" the economy.

Therefore recession IS the answer, no matter how unpalatable that is to the malinvested and the overleveraged.


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## Kimosabi (21 February 2008)

wayneL said:


> Therefore recession IS the answer, no matter how unpalatable that is to the malinvested, overleveraged, greedy and stupid.



There, fixed it for you...


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## ithatheekret (21 February 2008)

wayneL said:


> This is the problem with modern economic theory, the presumption that recession can & should be avoided by pulling various economic levers.
> 
> It's Balderdash.
> 
> ...




Yep economic ammelioration, but first you must let the cycle start , postpone it with stimulus after stimulus and stagflation sets in , continue and over stimulate and hyperinflation will eventuate .

Now that it has swung into cost- push inflation , the Fed , the ECB and any other body that has been over ethusiastic ,, will usually suffer exchange inflation as well , whilst majors in those parties deflate or better put depreciate usually along with their growth prospects .

The real suffering will be from the impoverished regions , like they didn't know . It just sends up the basic living costs globally .

This is how Crash and Co. are saving the poor .


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## MRC & Co (21 February 2008)

Are you guys saying "this is the recession we had to have?", might want to let old Pauly know about that one too!  Maybe he can tell Rudd to let the House of Reps know on the next sitting day


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## Smurf1976 (21 February 2008)

MRC & Co said:


> However, the "invisible hand" will somewhat aleviate the problem.  In that low economic growth, will push down demand for goods and services (in this case, a large problem being oil prices), which will push down the price of oil and hence help fight the inflation problem.



IMO we'll need an outright economic collapse to see a major, sustained fall in oil prices. Falling production, an even faster fall in global oil exports, the industrialisation of China etc means the West would need a massive fall in demand, far greater than has ever occurred, just to keep prices stable.

I wouldn't dismiss the possibility of a short term fall, but even with a _permanent_ severe recession throughout US, Canada, EU, Japan, Australia and others oil prices ought to continue to rise in fundamentals IMO once the short term dip is over.

I think we're all about to be reminded of the ultimate fundamental of industrial society. Energy dictates the terms, not politicians or central banks. Always has and probably always will. 

I note that oil prices have gone UP on the news of an impending economic slowdown. A situation that will continue until we either match economic growth to oil production (that is, no more growth.) or get off oil. That latter option would take years even if we really did literally declare war (with all that entails apart from actual fighting) on the problem.


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## MRC & Co (21 February 2008)

Sure, this is the problem with the "invisible hand", nobody has control over it!  It does what it wants, but eventually, it DOES move things back to equilibrium.

A recession in the US, will not just hit the West, it will ripple through the global economy and cause a dramatic fall in oil demand.  But I agree, to really curb inflation, it would need to be a large recession (and if thats what it takes, thats what it will be).  

But as pointed out above, the falling USD will only exacerbate the problem with imported inflation (I guess thats what was meant by exchange inflation?).  

The worse part as also pointed out above, is that this is cost-push, as opposed to demand driven, as is the case with stagflation (otherwise this would simply be inflation).


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## Uncle Festivus (21 February 2008)

Smurf1976 said:


> IMO we'll need an outright economic collapse to see a major, sustained fall in oil prices. Falling production, an even faster fall in global oil exports, the industrialisation of China etc means the West would need a massive fall in demand, far greater than has ever occurred, just to keep prices stable.
> 
> I wouldn't dismiss the possibility of a short term fall, but even with a _permanent_ severe recession throughout US, Canada, EU, Japan, Australia and others oil prices ought to continue to rise in fundamentals IMO once the short term dip is over.
> 
> ...




Yes, growth is going down now, in the US & China, the World Bank has cut it's global growth forecasts even for China. Some predict China will 'crash' to 5% growth.

I think a logarithmic effect will kick in ie for every X amount of oil price rise the effects to the bottom line of (non hedged) companies that rely on oil will be impaired. Each of these companies have a cost burden limit ie the point at which a cost or costs make staying in business not viable. At this stage costs are being past on in inflation figures, but there are signs consumers are hitting the upper threshold of what they are prepared to pay, so the costs will eventually be born by the service provider eg less profit. 

So we have cost inflation going up but growth going down ie stagflation.

The longer the oil price remains high even the hedged companies will have to accept higher prices eventually. The higher the oil price goes the faster and steeper will be the correction after precipitating a global recession. So yes, the contagion is going global and it's not going to be pretty.


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## proinvestor (22 February 2008)

I'm prepared for a market crash. The economic situation is becoming unsustainable.


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## prawn_86 (17 March 2008)

I read an interesting comment with regards to stagflation happening after the Vietnam war and now happening again after however many trillions have been pumped into the Iraq war.

Is this true? Howabout a few of you macro/economists have a crack at it.

My macro knowledge is not hte best, and with the way the current climate is things keep changing every week so its tough to learn about it!


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