Stagflation in the u s

STAGFLATION IN U.S INTRODUCTION An article from “The New York Times” published on Febuary 13 th, 2011 mentioned that: “In the USA, CONGRESS has made a terrible mistake Amid a rhetorical debate centered on words like “crisis,” “emergency” and “catastrophe,” it acted too fast While arguments were made about the stimulus bill’s specific components — taxpayer money for condoms, new green cars and golf carts for federal bureaucrats, another round of rebate checks — its more dangerous consequences were overlooked And now the package threatens a return to the kind of stagflation last seen in the 1970s From a global perspective, the picture only looks worse As we have debated how much money to borrow and spend in hopes of jumpstarting our economy, we’ve ignored the worldwide stimulus binge China, Europe and Japan are all spending hundreds of billions of dollars they don’t have in hopes of speeding up their economies, too That means the very countries we have relied on to buy our bonds, notably China and Japan, are now putting their own bonds on the global credit markets It seems that no one in Washington is discussing what happens when the world begins this gargantuan borrowing spree How high will interest rates rise? And more fundamentally, who will have the money to buy our bonds? It is possible that the Federal Reserve will succumb to pressure to “monetize” our debt — that is, print new money to buy our bonds In fact, the Fed is already suggesting that it will buy long-term [Type text] Page STAGFLATION IN U.S Treasury securities in order to lower borrowing costs If it does, then our money supply, which has already increased substantially over the past year, will grow even faster To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of confidence It calls into question the value of our money And while we all share in the pain, the people whom inflation hits hardest are elderly people who live on fixed incomes, those in the middle class who are struggling to save for retirement and college and lower-income people who live paycheck to paycheck Combine high inflation and high unemployment and you have stagflation Hindsight shows how the pain of the late 1970s and early 1980s could have been avoided, yet we’re now again planning to borrow and spend — and raise taxes — as President Jimmy Carter did Soon we may again find ourselves watching a rising “misery index” of inflation and unemployment together If that happens, individual earning power will evaporate, and our standard of living will decline….” Obviously, we are entering an era of high inflation, to judge by the massive growth of the money supply in the United States, Europe and Asia, and the stubbornness of central bankers who insist that high unemployment demands the creation of even more money The last time the world went through a similar period was the 1970s The term that defined the era was "stagflation." Thus because the 1970s stagflation did great harm to the U.S economy and global economy as a whole, followed by a period of recesssion and there are evidences that we are on our way to the replay of stagflation nowadays, a thorough understanding of stagflation is crucially important for individuals as well as policy-makers to make reasonable decisions The urgency of this trend has led us to choose “Stagflation in the U.S.” as the topic of our assignment In this study, we will give a clear [Type text] Page STAGFLATION IN U.S definiton of stagflation Besides, a deep analyse is made on the factual situation of the 1970s Great Stagflation and more recently, especially the main causes that leads to stagflation in the period Lastly, we will come up with some recommendations for individual decisions and implementation of government’s policies We hope that through the arguments and data in our paper, you could gain comprehensive understanding, including basic and in-depth knowledge, about the issue and be more confident, more active when making decisions in today economic situation [Type text] Page STAGFLATION IN U.S CONTENTS I Definition II Facts Facts of stagflation in the 1970s Fears of stagflation return III Causes General causes Causes of stagflation in the 1970s Explanation for risks of stagflation return IV Recommendations Increasing aggregate supply Long-term stock pick Commodity investment International system of buffer stocks [Type text] Page STAGFLATION IN U.S I DEFINITION The generally agreed-upon stagflation definition is a state of the economy that exhibits elevated unemployment rates and inflation at the same time Typically, stagflation presents serious problems for monetary policymakers, since the remedies for high unemployment are nearly directly opposed to the remedies available for inflationary cycles Most economists believe stagflation can be attributed to either failed economic policies or to destructive or catastrophic events that seriously affect the production capability of the overall economy During the 1970s, for instance, the United States experienced a prolonged period of stagflation due primarily to shortages of raw materials Livestock feed manufacturing was significantly impacted by the loss of the Peruvian anchovy fishery in 1972, but the most significant economic factor was likely the oil crisis of 1973, when OPEC severely limited the international oil supply in order to control prices and boost profits for their members Regardless of its origins, stagflation is likely to cause significant and prolonged economic problems that cannot be easily resolved High unemployment reduces the overall buying power of consumers and companies, and increasing prices lessen that buying power even more This can put a financial squeeze on both the consumer and the corporate sector and cause still more unemployment as companies try to [Type text] Page STAGFLATION IN U.S compensate for lower profits, increasing expenses and the resulting reduction in financial liquidity II FACTS STAGFLATION IN THE 1970s People often refer to the 1970s stagflation as ‘the bad old days’ When they think of the U.S economy in that time the following comes to mind first: o Recession o Inflation o Unemployment o High oil prices In the following parts, we will look more closely into some economic indicators, including Economic Growth Rate, Inflation Rate and Unemployment Rate, in order to identify Stagflation in this period of US history a Historical Economic Growth The 1970s were perhaps the worst decade of most industrialized countries', including the U.S.’s economic performance since the Great Depression Although there was no severe economic depression as witnessed in the 1930s, economic growth rates were considerably lower than postwar decades between 1945 and 1973 U.S manufacturing industries began to decline as a result, with the US running its last trade surplus (as of 2009) in 1975 [Type text] Page STAGFLATION IN U.S In this paper, Economic growth is measured by Gross Domestic Product (GDP) in current dollars (i.e Nominal GDP) and in year 2005 dollars (i.e Real GDP) As can be seen from the table and graph, in the 1970s and 1980s, US economy experienced several periods of contraction: 1974 GDP contracted 0.55%, 1975: 0.21%, 1980: 0.28% and 1982: 1.94% For the other years, real growth rate remained relatively small (less than 6%), with an exception of 1984 with a rate of 7.19%, indicating a period of slow growth and economic contraction Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 Annual Current-Dollar and "Real" Gross Domestic Product 1960-2000 GDP GDP GDP in GDP in GDP in GDP in billions Real billions Real billions billions of Growth Year of Growth of of chained rate chained rate current current 2005 % 2005 % dollars dollars dollars dollars 526.4 2,828.5 1975 1,637.7 4,875.4 -0.21% 544.8 2,894.4 2.33% 1976 1,824.6 5,136.9 5.36% 585.7 3,069.8 6.06% 1977 2,030.1 5,373.1 4.60% 617.8 3,204.0 4.37% 1978 2,293.8 5,672.8 5.58% 663.6 3,389.4 5.79% 1979 2,562.2 5,850.1 3.13% 719.1 3,607.0 6.42% 1980 2,788.1 5,834.0 -0.28% 787.7 3,842.1 6.52% 1981 3,126.8 5,982.1 2.54% 832.4 3,939.2 2.53% 1982 3,253.2 5,865.9 -1.94% 909.8 4,129.9 4.84% 1983 3,534.6 6,130.9 4.52% 984.4 4,258.2 3.11% 1984 3,930.9 6,571.5 7.19% 1,038.3 4,266.3 0.19% 1985 4,217.5 6,843.4 4.14% 1,126.8 4,409.5 3.36% 1986 4,460.1 7,080.5 3.46% 1,237.9 4,643.8 5.31% 1987 4,736.4 7,307.0 3.20% 1,382.3 4,912.8 5.79% 1988 5,100.4 7,607.4 4.11% [Type text] Page STAGFLATION IN U.S 1974 1,499.5 4,885.7 -0.55% 1989 1990 5,482.1 5,800.5 7,879.2 8,027.1 3.57% 1.88% Table 1: U.S Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000) Source: http://www.bea.gov/national/xls/gdplev.xls Figure 1: U.S Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000) b Historical Inflation Rates Table shows Inflation Rate data for the USA during the time 19592000, including monthly and annual rates Year over Year compares the growth rate of the Consumer Price Index (CPI-U) from one period to the same period a year earlier [Type text] Page STAGFLATION IN U.S The oil shocks of 1973 and 1979 added to the existing ailments and conjured high inflation throughout much of the world for the rest of the decade Before the year 1970, annual inflation rates mainly stayed below 3% However, at the start of the new decade, the figure had more than doubled itself 10 years earlier, then slowing down at around 4% in the following years In 1974, there was a sharp rise in US inflation rate when it reached its highest of 11.04% in the last 15-year period The buying power of money decreased remarkably and consumers were not willing to buy anymore From 1975 to 1978, the rate went between relatively high levels of 7.6% and 9.1%, before reaching a double-digit figure again in 1979, breaking the 1974 record and soar to a new peak of 13.5% in 1980 In late 1980s, the situation became stable with the rate being kept under 5% Mar Apr May Jun Jul Aug Sep Oct Nov 1.2945% 1.6181% 1.6181% 1.9355% 1.6077% 1.9355% 1.6077% 1.9293% 1.6026 2.5559% 2.8662% 2.8662% 2.5316% 2.8481% 3.4810% 3.4810% 3.7855% 3.7855 2.8037% 2.4768% 2.7864% 2.7778% 2.7692% 2.4465% 2.7523% 2.4316% 2.7356 3.9394% 3.9275% 3.9157% 4.2042% 4.4910% 4.4776% 4.4643% 4.7478% 4.7337 5.2478% 5.5233% 5.5072% 5.4755% 5.4441% 5.7143% 5.6980% 5.6657% 5.9322 5.8172% 6.0606% 6.0440% 6.0109% 5.9783% 5.4054% 5.6604% 5.6300% 5.6000 4.7120% 4.1558% 4.4041% 4.6392% 4.3590% 4.6154% 4.0816% 3.8071% 3.2828 3.5000% 3.4913% 3.2258% 2.7094% 2.9484% 2.9412% 3.1863% 3.4230% 3.6675 4.5894% 5.0602% 5.5288% 5.9952% 5.7279% 7.3810% 7.3634% 7.8014% 8.2547 [Type text] Page STAGFLATION IN U.S % 10.3926% 10.0917% 10.7062% 10.8597% 11.5124% 10.8647% 11.9469% 12.0614% 12.200 % 10.2510% 10.2083% 9.4650% 9.3878% 9.7166% 8.6000% 7.9051% 7.4364% 7.3786 6.0721% 6.0491% 6.2030% 5.9701% 5.3506% 5.7090% 5.4945% 5.4645% 4.8825 6.4401% 6.9519% 6.7257% 6.8662% 6.8301% 6.6202% 6.5972% 6.3903% 6.7241 6.5546% 6.5000% 6.9652% 7.4135% 7.7049% 7.8431% 8.3062% 8.9286% 8.8853 10.0946% 10.4851% 10.8527% 10.8896% 11.2633% 11.8182% 12.1805% 12.0715% 12.611 % 14.7564% 14.7309% 14.4056% 14.3845% 13.1327% 12.8726% 12.6005% 12.7660% 12.648 % 10.4869% 10.0000% 9.7800% 9.5526% 10.7618% 10.8043% 10.9524% 10.1415% 9.5906 6.7797% 6.5095% 6.6815% 7.0640% 6.4410% 5.8505% 5.0429% 5.1392% 4.5891 3.5979% 3.8988% 3.5491% 2.5773% 2.4615% 2.5589% 2.8601% 2.8513% 3.2653 4.8008% 4.5639% 4.2339% 4.2211% 4.2042% 4.2914% 4.2701% 4.2574% 4.0514 3.7037% 3.6857% 3.7718% 3.7608% 3.5543% 3.3493% 3.1429% 3.2289% 3.5138 Table 2: U.S Annual and Monthly Inflation Rates (1965-1985) Source: http://www.rateinflation.com/inflation-rate/usa-historicalinflation-rate.php?form=usair [Type text] Page 10 STAGFLATION IN U.S Second, both stagnation and inflation can result from inappropriate macroeconomic policies For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets, either of these factors can cause stagflation Excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral CAUSES OF STAGFLATION IN THE 1970s a Relationship between inflation and unemployment Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment They believed that inflation was tolerable because it meant the economy was growing and unemployment would be low Their general belief was that an increase in the demand for goods would drive up prices, which in turn would encourage firms to expand and hire additional employees This would then create additional demand throughout the economy According to this theory, if the economy slowed, unemployment would rise, but inflation would fall Therefore, to promote economic growth, a country's central bank could increase the money supply to drive up demand and prices without being terribly concerned about inflation According to this theory, the growth in money supply would increase employment and promote economic growth These beliefs were based on the Keynesian school of economic thought, named after twentiethcentury British economist John Maynard Keynes [Type text] Page 19 STAGFLATION IN U.S Nevertheless, in the 1970s, Keynesian economists had to reconsider their beliefs as the U.S and other industrialized countries entered a period of stagflation b High oil price in the 1970s The 1973 oil crisis started in October 1973, when the members of the OAPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo Figure shows a history of oil prices, including Nominal monthly average oil price and Inflationadjusted monthly average oil price as measured in 2007 dollars Figure 8: Nominal monthly Ave, Oil price and Inflation adjusted monthly average oil price (19462008) Source: InflationData.com as of 1/16/2008 [Type text] Page 20 STAGFLATION IN U.S As illustrated, the period from 1946 to 1972 saw a stable trend in the price of oil at around $20 Unexpectedly, oil price during the period between 1972 and 1978 witnessed a 2.5 time increase, followed by a soar in the following year to hit a new record of $100 However, the oil price was off its peak of the year 1979, falling back by 80% to just $20 in 1986 The next years experienced a time of wild fluctuation and instability Figure shows year-over-year percentage changes in the core Consumer Price Index (CPI) from 1958 to 2003, with a closer look on the late 1970s and early 1980s Figure 9: Inflation soared in the late 1970s and early 1980s Source: Bureau of Labor Statistics [Type text] Page 21 STAGFLATION IN U.S This oil crisis in 1973 resulted in actual or relative scarcity of raw materials The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fueling stations and increased production costs for industry c Government’s policies In July 1969, the Federal Reserve Board raised interest rates Because the United States had spent enormous amounts of money on the Cold War, on the Vietnam War, on aid to less developed countries and, above all, on President Johnson‘s welfare society, the resources of even the mighty United States economy were stretched and prices were rising so the Fed acted to slow the economy down However, things turn out to be unexpected Towards the end of 1969, that is, less than six months after the Fed had acted, policies instituted by the Nixon Administration began to push unemployment up The intention of these policies was to stop inflation by reducing demand Demand was to be reduced by reducing personal income, which was assumed to be a function of increasing unemployment But President Nixon had already arranged in his message to Congress that ‚if unemployment were to rise the programme of unemployment insurance ‚automatically would act to sustain personal income He had therefore undermined in advance his capacity to attack inflation through increasing unemployment and reducing personal incomes For his policies, if they did not reduce incomes as much as the increase in unemployment would have done in an earlier period, they did reduce production The number of unemployed shot up by more than one million in less than a year The rate of increase in the gross national product dropped sharply [Type text] Page 22 STAGFLATION IN U.S If it is socially unacceptable to move demand down far enough to balance supply, then the only way of achieving balance in an inflationary situation is to move supply up or, at least, keep it up to meet demand However, when insufficiency of supply started to cause inflation, the United States have applied monetary and fiscal policies that curtail certain areas of demand, including investment demand, and that curtail production This reduction of supply while demand necessarily stays up under the pressure of government as well as of private outlays, achieved those twin evils of more unemployment and higher prices EXPLANATION FOR RISKS OF STAGFLATION RETURN Although many forces buffet the U.S economy, the near-zero interest rate policy of the Federal Reserve is the prime contributor to the current bout with stagflation Since 1945, most of the world has been on a dollar standard Today, for emerging markets outside of Europe, the dollar is used for invoicing both exports and imports; it is the intermediary currency used by banks for clearing international payments, and the intervention currency used by governments To avoid conflict in targeting exchange rates, the rule of the game is that the U.S remains passive without an exchange-rate objective of its own Not having an exchange-rate constraint, the Fed can conduct a more independent monetary policy than other central banks can How it chooses to exercise this independence is crucial to the stability of the international monetary system as a whole For more than two years, the Fed has chosen to keep short-term interest rates on dollar assets close to zero and—over the past year—applied [Type text] Page 23 STAGFLATION IN U.S downward pressure on long rates through the so-called quantitative easing measures to increase purchases of Treasury bonds The result has been a flood of hot money (i.e., volatile financial flows that are subject to reversals) from the New York financial markets into emerging markets on the dollar's periphery—particularly in Asia and Latin America, where natural rates of interest are much higher Wanting to avoid sharp appreciations of their currencies and losses in international competitiveness, many Asian and Latin American central banks intervened to buy dollars with domestic base monies and lost monetary control This caused a surge in consumer price index (CPI) inflation of more than 5% in major emerging markets such as China, Brazil and Indonesia, with the dollar prices of primary commodities rising more than 40% world-wide over the past year So the proximate cause of the rise in U.S prices is inflation in emerging markets, but its true origin is in Washington There is a second, purely domestic avenue by which near-zero interest rates in U.S interbank markets are constricting the economy Since July 2008, the stock of so-called base money in the U.S banking system has virtually tripled As part of its rescue mission in the crisis and to drive interest rates down, the Fed has bought many nontraditional assets (e.g., mortgage-backed securities) as well as Treasurys Yet these drastic actions have not stimulated new bank lending The huge increase in base money is now lodged as excess reserves in large commercial banks In mid-2011, the supply of ordinary bank credit to firms and households continues to fall from what it had been in mid-2008 Although large corporate enterprises again have access to bond and equity financing, bank credit is the principal source of finance for working capital for small and medium-sized enterprises (SMEs) enabling them to purchase labor and other supplies In cyclical upswings, SMEs have traditionally been the main engines for increasing employment, but not in the very weak upswing of 2010-11, where employment gains have been meager or nonexistent [Type text] Page 24 STAGFLATION IN U.S Why should zero interest rates be causing a credit constraint? After all, conventional thinking has it that the lower the interest rate the better credit can expand But this is only true when interest rates—particularly interbank interest rates—are comfortably above zero Banks with good retail lending opportunities typically lend by opening credit lines to nonbank customers But these credit lines are open-ended in the sense that the commercial borrower can choose when—and by how much—he will actually draw on his credit line This creates uncertainty for the bank in not knowing what its future cash positions will be An illiquid bank could be in trouble if its customers simultaneously decided to draw down their credit lines If the retail bank has easy access to the wholesale interbank market, its liquidity is much improved To cover unexpected liquidity shortfalls, it can borrow from banks with excess reserves with little or no credit checks But if the prevailing interbank lending rate is close to zero (as it is now), then large banks with surplus reserves become loath to part with them for a derisory yield And smaller banks, which collectively are the biggest lenders to SMEs, cannot easily bid for funds at an interest rate significantly above the prevailing interbank rate without inadvertently signaling that they might be in trouble Indeed, counterparty risk in smaller banks remains substantial as almost 50 have failed so far this year That the American system of bank intermediation is essentially broken is reflected in the sharp fall in interbank lending: Interbank loans outstanding in March 2011 were only a third of their level in May 2008, just before the crisis hit How to fix bank intermediation is a long story for another time But it is clear that the Fed's zero interest-rate policy has worsened the situation Without more lending to SMEs, domestic economic stagnation will continue even though inflation is taking off The stagflation of the 1970s was brought on by unduly easy U.S monetary policy in conjunction with attempts to "talk" the dollar down, leading to massive outflows of hot money that destabilized the monetary [Type text] Page 25 STAGFLATION IN U.S systems of America's trading partners Although today's stagflation is not identical, the similarities are striking IV RECOMMENDATIONS Stagflation undermined the dominant Keynesian consensus, and placed renewed emphasis on microeconomic behavior, particularly neoclassical economics with its attempt to root macroeconomics in microeconomic formalisms The rise of conservative theories of economics, including monetarism, can be traced to the perceived failure of Keynesian policies to combat stagflation or even properly explain it Stagflation in the USA was defeated by then Federal Reserve chairman, Paul Volcker, who sharply increased interest rates to reduce money supply from 1979-1983 in what was called a "disinflationary scenario." Starting in 1983, fiscal stimulus and money supply growth combined to create a sharp economic recovery, which is in line with standard macroeconomic models; however, there was a five-to-six-year jump in unemployment during the Volcker disinflation It appears that Volcker trusted unemployment to self-correct and return to its natural rate within a reasonable period, which it did A recommendation that seems to have great effects on stagflation is to increase aggregate supply, which is shown clearly below: INCREASING AGGREGATE SUPPLY Increase aggregate supply is the best antidote for stagflation We can’t choose changes in aggregate demand as a solution because if aggregate demand increases, then inflation rises but unemployment falls (because output rises) If aggregate demand falls, then inflation falls but unemployment rises The explanation lies with the aggregate supply curve If the aggregate supply curve shifts left (decreases) due to costs [Type text] Page 26 STAGFLATION IN U.S increases (like with the rising oil prices in the 1970s), we see both higher prices and lower output (higher unemployment) As a result, increase the aggregate supply is the best choice There are four potential ways to increase aggregate supply a Tax cut Tax cuts were part of fiscal policy, designed to shift the aggregate supply curve Under fiscal policy all that matters is the size of the tax cut, not how it is accomplished Supply-side policy is more concern with the incentives built in the tax system that encourage working and invesment They are interested in the type of taxes levied as well as the tax rate Low marginal income tax rates allow people to keep more of what they earn, perhaps encouraging them to work more hours This would increase aggregate supply Low tax rates on profits as well as special investment tax breaks encourage investment in plants and equipment that also increase aggregate supply How these tax cuts impact the federal budget? Supply-siders argued that by increasing work and investment incentives, a tax cut could actually increase tax revenue because the taxes would belevied on larger incomes and profits Arthur Laffer, one of Reagan's advisors, demonstrated this relationship with the Laffer curve: If tax rates are above C, then a tax cut will actually increase revenue Unfortunately in 1982 tax rates were well below C, and revenues fell [Type text] Page 27 STAGFLATION IN U.S sharply Reagan tax cuts certainly played a role in the economic expansion of the 1980s, but this could be due to the impact of the tax cuts on aggregate demand The tax cuts also contributed to large deficits b Human capital investment Encouraged an increase in hours worked through tax incentives is one way to increase aggregate supply Another way is to increase the quality of the workforce This set of skills and knowledge are known as human capital By increasing the skills of the labor force, structural unemployment falls, causing aggregate supply to increase Also, skills increase labor productivity (the amount of output produced per worker per hour), also increasing aggregate supply How can government policy increase human capital? Some politicians favor greater investment in education, while others support on-the-job training 1996 welfare reform allowed for education and training programs designed to increase the human capital of those on public assistance c Deregulation There is no doubt that government regulation increases the costs of production Environmental and safety regulation, mandatory compensation and benefits regulation, consumer protection regulations, higher prices in regulated industries - all of these costs add up, and reducing them would increase aggregate supply However, it is import to note that relaxing some of these restrictions could be costly too Air pollution contributes to health problems, which result in higher medical costs and absenteeism for firms A lack of maternity leave may cause some women to quit, and retraining workers is costly No one would suggest that the government stop regulated the safety of drugs or automobiles Supply-siders argue that there is too [Type text] Page 28 STAGFLATION IN U.S much regulation, in the past 25 years they have supported the deregulation of the financial sector, the airlines, and communications They currently support the deregulation of the electric/natural gas utilities d Infrastructure investment Recall that infrastructure refers to the transportation, communication, and legal networks that allow markets to function The U.S infrastructure is far superior to most nations, but improvements could increase aggregate supply: more roads and airports would reduce travel time, fiber optic networks allow for faster internet connections This time savings may be devoted to other productive activities Infrastructure investment also increases aggregate demand When the govenrment builds roads, they hire engineers and construction firms, who hire workers and buy cement , causing the multiplier effect to occur Government infrastructure spending declined throughout the 1970s and 80s (as a % of GDP), and some argue that this slowdown contributed to a slowdown in the growth of labor productivity during the same period Besides, there are many other recommendations that are suggested by the experts and advisors LONG-TERM STOCK PICK One of the many problems of stagflation is that it makes it difficult for people to find safe places to put their wealth Inflation makes the money stored in bank accounts less valuable as prices rise faster than any interest payments can keep up with As well, the stock market will be [Type text] Page 29 STAGFLATION IN U.S depressed due to the stagnant economy Investing in long-term stock picks may be the only wise course among many poor options COMMODITY INVESTMENT In the past, commodities have proved the best investments in stagflation: they returned 50% from April 1973 to December 1974 while stock markets lost 31%, and they outperformed equities in milder periods of stagflation as well, according to Fidelity International Some fear the same is not true today and that the commodities market is starting to overheat, but seasoned financial adviser Jonathan Davis of Jonathan Davis WM believes commodities are the only sensible place to be in a stagflationary environment With the global population growing faster than the supply of raw materials he believes agriculture in particular looks attractive, although the market as a whole could be choppy in the short term INTERNATIONAL SYSTEM OF BUFFER STOCKS A long-term solution to stagflation proposed by Kaldor was an international system of buffer stocks in major commodities This could be used to raise commodity prices when they fell to too low a level by buying on the market (which would help incomes in developing nations and other producing nations), and to lower prices by selling into the market when prices were rising too high (Kaldor 1976: 228–229) In short, Post Keynesian economics can easily understand and deal with [Type text] Page 30 STAGFLATION IN U.S stagflation The wage-price spirals that broke out by the end of the 1960s in some industrialized nations could have been dealt with by incomes policy (national wage arbitration/wage-price controls), and the long-term solution was, and still is, an international system of commodity buffer stocks REFERENCES [Type text] Page 31 STAGFLATION IN U.S http://www.wikipedia.com http://www.studien-von-zeitfragen.de http://socyberty.com/economics http://www.lakehillsliberals.org http://economics.about.com/od/useconomichistory http://www.investopedia.com/articles/economics http://dailyreckoning.com http://www.washingtontimes.com/news http://royaldutchshellplc.com http://bearingdrift.com FOREIGN TRADE UNIVERSITY [Type text] Page 32 STAGFLATION IN U.S FACULTY OF ECONOMICS & INTERNATIONAL BUSINESS MACROECONOMICS ASSIGNMENT TOPIC: STAGFLATION IN THE UNITED STATES Group Bui Thi Ngoc Anh Le Tran Thu Ha Nguyen Thi Huong Giang Nguyen Hoang Mai Nguyen Le Bao Ngoc Nguyen Ngoc Thuy Class Lecturer KTEE203.2 Hoang Xuan Binh PhD Ha Noi, October 2011 [Type text] Page 33 [...]... Inflation soared in the late 197 0s and early 198 0s Source: Bureau of Labor Statistics [Type text] Page 21 STAGFLATION IN U. S This oil crisis in 1973 resulted in actual or relative scarcity of raw materials The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fueling stations and increased production costs for industry c Government s policies In July... workers is costly No one would suggest that the government stop regulated the safety of drugs or automobiles Supply-siders argue that there is too [Type text] Page 28 STAGFLATION IN U. S much regulation, in the past 25 years they have supported the deregulation of the financial sector, the airlines, and communications They currently support the deregulation of the electric/natural gas utilities d Infrastructure... markets, but its true origin is in Washington There is a second, purely domestic avenue by which near-zero interest rates in U. S interbank markets are constricting the economy Since July 2008, the stock of so-called base money in the U. S banking system has virtually tripled As part of its rescue mission in the crisis and to drive interest rates down, the Fed has bought many nontraditional assets (e.g., mortgage-backed... falls (because output rises) If aggregate demand falls, then inflation falls but unemployment rises The explanation lies with the aggregate supply curve If the aggregate supply curve shifts left (decreases) due to costs [Type text] Page 26 STAGFLATION IN U. S increases (like with the rising oil prices in the 197 0s) , we see both higher prices and lower output (higher unemployment) As a result, increase the. .. seriously, there is a fear of stagflation return According to the The Wall Street Journal from February 2008, The U. S is facing an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 197 0s At the beginning of 2008, inflation was rising The Labor Department said consumer prices in the U. S jumped 0.4% in January... exercise this independence is crucial to the stability of the international monetary system as a whole For more than two years, the Fed has chosen to keep short-term interest rates on dollar assets close to zero and—over the past year—applied [Type text] Page 23 STAGFLATION IN U. S downward pressure on long rates through the so-called quantitative easing measures to increase purchases of Treasury bonds The. .. credit is the principal source of finance for working capital for small and medium-sized enterprises (SMEs) enabling them to purchase labor and other supplies In cyclical upswings, SMEs have traditionally been the main engines for increasing employment, but not in the very weak upswing of 2010-11, where employment gains have been meager or nonexistent [Type text] Page 24 STAGFLATION IN U. S Why should zero... either of these factors can cause stagflation Excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause Both types of explanations are offered in analyses of the global stagflation of the 197 0s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting... is to increase the quality of the workforce This set of skills and knowledge are known as human capital By increasing the skills of the labor force, structural unemployment falls, causing aggregate supply to increase Also, skills increase labor productivity (the amount of output produced per worker per hour), also increasing aggregate supply How can government policy increase human capital? Some politicians... arranged in his message to Congress that ‚if unemployment were to rise the programme of unemployment insurance ‚automatically would act to sustain personal income He had therefore undermined in advance his capacity to attack inflation through increasing unemployment and reducing personal incomes For his policies, if they did not reduce incomes as much as the increase in unemployment would have done in an earlier ... Page STAGFLATION IN U.S compensate for lower profits, increasing expenses and the resulting reduction in financial liquidity II FACTS STAGFLATION IN THE 1970s People often refer to the 1970s stagflation. .. stagflation as the bad old days’ When they think of the U.S economy in that time the following comes to mind first: o Recession o Inflation o Unemployment o High oil prices In the following parts,... earlier, then slowing down at around 4% in the following years In 1974, there was a sharp rise in US inflation rate when it reached its highest of 11.04% in the last 15-year period The buying power