Monday, April 18, 2005


Reality vs. The Bush League: Stagflation

Dismal news from the world of Economics, the dismal science. Rising energy prices make everything cost more - delivery trucks burn gas, too. meanwhile, employment is falling. Goodbye, bulls and bears - hello, the mythic beast STAGFLATION. Paul Krugman has the details:
A Whiff of Stagflation
Published: April 18, 2005

In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options. If the Fed cut interest rates to create jobs, it risked causing an inflationary spiral; if it raised interest rates to bring inflation down, it would further increase unemployment.

Can it happen again?

Last week fears of a return to stagflation sent stock prices to a five-month low. What few seem to have noticed, however, is that a mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived.
We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong.

Suppose, for example, that the consumer pullback visible in recent data turns out to be bigger than we now think, and growth stalls. (Not that long ago many economists thought that an oil price in the 50's would cause a recession.) Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar?
Sounds like Reality is about to "shock and awe" W and the Bush League with a whipsaw rollercoaster ride combining a massively increasing deficit with the falling dollar, rising oil prices, and falling employment levels. (Remember - if your unemployment benefits run out, you're not unemployed any more. No matter how many résumés you send out after your benefits run out, you are "not actively seeking work.")

The shining light from the Cheney-Enron joint energy policy seems to be from the US economy going down in oil-enhanced flames. Not that W cares - he got re-elected and now hopes to bankrupt the US Government so as to "starve the beast." Too bad the rest of us get to starve, too.


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