Is Stagflation Riding Back into Town?

[ForexDancer]

Anyone want to debate on this topic?

What is stagnation?fficeffice" />>>

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The word, “Stagflation,” is again rearing its ugly head among the chattering classes of economists and these people are wondering if this word, not often heard of, nor seen even in many of the forex glossaries, of financial terminology, is again, riding back into town. So what is stagflation and what are the indicators, giving rise to this word again?>>
Stagflation is largely a combination of inflation and inflation and the word, stagflation, is largely attributed to Iain MacLeod, a British Tory MP, and (who in 1970, just before his death), became Chancellor of the Exchequer, who coined the term, during a speech of his to Parliament, in 1965; when he said, “We now have the worst of both worlds – not just inflation or stagnation on the other. We now have a sort of “stagflation” situation.>>
Stagflation is portmanteau of the words, stagnation and inflation, which is a term used in macroeconomics, when talking about a period of high inflation; coupled with a economic stagnation, high unemployment or economic recession. The word “Stag,” means a relatively sluggish economy – combined with job shortages, little income, and growth. The word, “Flation,” means rising prices. This is also complimented with escalating levels of credit.>>
The term, “stagflation” then became widely used – describing the situation of the world’s capitalist economies, from the late 1960’s and 70’s, as a result of the collapse of the Bretton Woods Accord, from 1968-73.
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What are its effects?
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Stagnation leads to the creation of putting government policies into a bind (sometimes referred to as a “Policy Bind”) making it such that trying to correct one problem – leads to the direct creation of another. In monetary policies, this becomes even more of a pain, because the mere effects of inflation and rising unemployment make it hard for the central banks to counteract.
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A central bank has two choices and not either of them is easy to arrive at, nor going to have a particularly sweet after-taste.
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A) The bank might elect to choose a loose monetary policy – in the hope of creating jobs and stimulating the economy, by increasing the money supply, by lowering its interest rates, with the probable result of fuelling the problem even further.
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B) Enact a tight monetary policy, by increasing interest rates, and try to rein in inflation – increasing, perhaps, greater unemployment.
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The difficulties facing governments.
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The governments also face great difficulties, due to the fact that the lower the growth yields, the lower the tax revenues and, moreover, their expenditures rise – fuelling inflation. Enter into the equation bracket creep, whereby individuals are increasingly taxed with higher and higher rates; even though they have less and less spending power.>>
For example, in 1974 prices in the ffice:smarttags" />lace w:st="on">U.S.lace> rose by more than 10 per cent while unemployment reached 9.2 percent. Every measure taken to reduce unemployment stoked up inflation without reducing unemployment, and every measure taken to reduce inflation failed to do anything except increase unemployment. The intractable crisis of stagflation led to the adoption of monetarist ideologies by Ronald Reagan and Margaret Thatcher. >>
The Bank for International Settlements, based in Basel, Switzerland, the bank for the world's central banks, warns in its most recent annual report that global stagflation is a real possibility.
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Why are some people now starting to talk of Stagnation again? >>
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According to Keynes (the great English economist John Maynard Keynes), fast growth in demand, leads to bottlenecks that prevent supply from keeping up with demand. That leads to rising prices for goods and services. At some point an inflationary psychology sets in – the price-wage spiral, as higher prices cause workers to demand higher wages to keep up, which in turn produces higher prices.>>
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According to the Neo-Keynesian theory, which developed a more detailed model of inflation, it is suggested that there are two kinds of inflation – wage pull and cost push. With this, in mind, stagflation is caused by cost push inflation, which could be the result of monetary policy, insufficient reliance to the economy or from purely external factors.>>
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External factors, say I. What external factors, for example?>>
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And talking about the latter, external factors, we now have the very real and high price of a barrel of crude oil, hitting us again – rather like that of the 1970’s situation. Some economists have been suggesting – even as early 2004 and later, in 2005, that stagflation may be riding back into town and people’s vocabulary, what with the recent high prices for a barrel of crude and the US incremental interest rate hikes – coupled with stagnant employment rates. The discussion continues, between Monetarists and Keynesian economists – explaining this phenomenon.>>
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There is a raft of other factors at play too, not to mention over-capacity, which is pushing prices ever lower, intervention, in the currency markets, by national governments, which has kept prices from rising. And what if the If the Bank forInternational Settlements is right, in what they seem to be saying…??? >>
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The global economy and inflationary momentum.>>
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That the global economy has built up significant inflationary momentum, because global central banks, which did not see inflation in their usual measures, kept the money supply growing too fast for too long…Then that has created exactly the kind of inflationary situation described by monetarists in which too much money supply faces too little demand for money>>
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According to the Bank for International Settlements, we could be headed for slow growth and high inflation for a while – even if everything goes well in the effort to slow inflation by raising interest rates. >>
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To be or not to be? That is the question.>>
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Stagflation may not be an absolute certainty. However, the current outlook, whichever way you look at it (either from a Monetarist or Keynesian point of view), things are starting to look, well…Rather stagnant for now, in my view, at least. >>
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As Shakespeare once famously said, “To be or not to be?” That is the question. To find the answer to that conundrum, I guess, we will have to wait a bit longer to find out. Time, as they say, will tell. However, I believe that, that judgment day is not too far away. >>
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[swopejs]

Are we really in a high inflation economy right now? What about using the term "stagcession?"