Tiểu luận tiếng anh Kinh tế vĩ mô Tình hình lạm phát tại Mỹ Stagflation in the United States.doc

Tiểu luận tiếng anh Kinh tế vĩ mô Tình hình lạm phát tại Mỹ Stagflation in the United States.

An article from “The New York Times” published on Febuary 13th, 2011 mentioned that:

“In the USA, CONGRESS has made a terrible mistake Amid a rhetorical debate centered onwords like “crisis,” “emergency” and “catastrophe,” it acted too fast While arguments weremade about the stimulus bill’s specific components — taxpayer money for condoms, new greencars and golf carts for federal bureaucrats, another round of rebate checks — its more dangerousconsequences were overlooked And now the package threatens a return to the kind of stagflationlast 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 jump-starting our economy, we’ve ignored the worldwidestimulus binge China, Europe and Japan are all spending hundreds of billions of dollars theydon’t have in hopes of speeding up their economies, too That means the very countries we haverelied on to buy our bonds, notably China and Japan, are now putting their own bonds on theglobal credit markets

It seems that no one in Washington is discussing what happens when the world begins thisgargantuan borrowing spree How high will interest rates rise? And more fundamentally, whowill have the money to buy our bonds? It is possible that the Federal Reserve will succumb topressure to “monetize” our debt — that is, print new money to buy our bonds In fact, the Fed isalready suggesting that it will buy long-term Treasury securities in order to lower borrowingcosts If it does, then our money supply, which has already increased substantially over the pastyear, 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 wholive 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 mayagain find ourselves watching a rising “misery index” of inflation and unemployment together Ifthat 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 moneysupply 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 wentthrough a similar period was the 1970s The term that defined the era was "stagflation."

Thus because the 1970s stagflation did do 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 importantfor 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 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

I Definition

II Facts

1 Facts of stagflation in the 1970s

2 Fears of stagflation return

III Causes

1 General causes

2 Causes of stagflation in the 1970s

3 Explanation for risks of stagflation return

IV Recommendations

1 Increasing aggregate supply

2 Long-term stock pick

3 Commodity investment

4 International system of buffer stocks

I DEFINITION

The generally agreed-upon stagflation definition is a state of the economy that exhibits elevatedunemployment rates and inflation at the same time Typically, stagflation presents seriousproblems for monetary policymakers, since the remedies for high unemployment are nearlydirectly opposed to the remedies available for inflationary cycles Most economists believestagflation can be attributed to either failed economic policies or to destructive or catastrophicevents 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 toshortages 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 theoil crisis of 1973, when OPEC severely limited the international oil supply in order to controlprices and boost profits for their members

Regardless of its origins, stagflation is likely to cause significant and prolonged economicproblems 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 Thiscan put a financial squeeze on both the consumer and the corporate sector and cause still moreunemployment as companies try to compensate for lower profits, increasing expenses and theresulting reduction in financial liquidity

II FACTS

1 STAGFLATION IN THE 1970s

People often refer to the 1970s stagflation as ‘the bad old days’ Whenthey think of the U.S economy in that time the following comes tomind first:

In the following parts, we will look more closely into some economic indicators, includingEconomic 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.’seconomic performance since the Great Depression Although there was no severe economicdepression as witnessed in the 1930s, economic growth rates were considerably lower thanpostwar decades between 1945 and 1973 U.S manufacturing industries began to decline as aresult, with the US running its last trade surplus (as of 2009) in 1975

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 andgraph, in the 1970s and 1980s, US economy experienced several periods of contraction: 1974GDP contracted 0.55%, 1975: 0.21%, 1980: 0.28% and 1982: 1.94% For the other years, realgrowth rate remained relatively small (less than 6%), with an exception of 1984 with a rate of7.19%, indicating a period of slow growth and economic contraction

Annual Current-Dollar and "Real" Gross Domestic Product

1960-2000 Year

GDP

Year

GDP GDP in

billions of

current

dollars

GDP in billions of chained 2005 dollars

Real Growth rate

%

GDP in billions of current dollars

GDP in billions of chained 2005 dollars

Real Growth rate

Figure 1: U.S Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000)

b Historical Inflation Rates

Table 2 shows Inflation Rate data for the USA during the time 1959-2000, including monthlyand 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

The oil shocks of 1973 and 1979 added to the existing ailments and conjured high inflationthroughout much of the world for the rest of the decade Before the year 1970, annual inflationrates mainly stayed below 3% However, at the start of the new decade, the figure had more thandoubled itself 10 years earlier, then slowing down at around 4% in the following 2 years In

1974, there was a sharp rise in US inflation rate when it reached its highest of 11.04% in the last15-year period The buying power of money decreased remarkably and consumers were notwilling 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 beingkept under 5%

Figure 2: U.S Annual Inflation Rate (1959-2000 Year-over-Year)

Unemployment Rate (%) 1960-2000

As previously analyzed, we can see that the period of late 1970s and early 1980s is a typicalexample of stagflation of the economy, which is the combination of low growth rate, in otherwords the “stag”, together with high inflation and unemployment rate, or the “flation” in theterm By the time of 1980, when U.S President Jimmy Carter was running for re-election against Ronald Reagan, the misery index (the sum of the unemployment rate and theinflation rate) had reached an all-time high of 21.98% The economic problems of the 1970swould result in a sluggish cynicism replacing the optimistic attitudes of the 1950s and 1960s.Faith in government was at an all-time low in the aftermath of Vietnam and Watergate, asexemplified by the low voter turnout in the 1976 United States presidential election.

2 FEAR OF STAGFLATION RETURN

In the 1970s, stagflation shocked traditional Keynesian economists, whose models said theeconomy could not suffer from both high unemployment and rapid inflation at the same time.Unfortunately, the Keynesians were wrong, because an economy obviously can experience both

evils simultaneously The typical view is that an economy in a deep recession is in no danger of

price inflation This belief is wrong both in theory and in practice

The worst bout of inflation during the postwar period occurred during the economic slump of thelate 1970s and early 1980s More seriously, there is a fear of stagflation return

According to the The Wall Street Journal from February 2008, “The U.S is facing anunwelcome combination of looming recession and persistent inflation that is reviving angst aboutstagflation, a condition not seen since the 1970s”

At the beginning of 2008, inflation was rising The Labor Department said consumer prices in the U.S jumped 0.4% in January and was 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 byeducation, medical care, clothing and hotels They was up by 2.5% from the previous year, a 10-month high

Some readers may remember the “misery index,” the sum of the unemployment and inflation

rates The official unemployment rate in 2009 averaged 9.3 percent, for a total misery-index

rating of 12.0 This is the highest misery rating in 26 years, going all the way back to 1983 when

it was 13.4 Prices rose 2.7 percent during 2009, according to the Bureau of Labor Statistics’

recent update of the Consumer Price Index (CPI), signalling a return of “stagflation”, a merger ofstagnation and inflation

More recently, in 2011, yet with prices on the rise and unemployment still high, the U.S economy again seems to be entering stagflation April's producer price index for finished goods,

which excludes services and falling home prices, rose 6.8% The Bureau of Labor Statistics

reports that intermediate goods prices for April were rising at a 9.4% annual clip Meanwhile the official nationwide unemployment rate is mired close to 9%, without counting a large backlog of discouraged workers who are no longer officially in the labor force So stagflation it is.

The fact has shown that inflation for January showed an uptick that could signal the return ofstagflation (cost-push inflation during periods of weak economic growth and slack demand) Seethe FRB of Cleveland web site for a good discussion of measuring core inflation with anexplanation of the measures used in the graph below

As can be seen from the graph, the misery index is simply the unemployment rate added to theinflation rate When either is high, there is some level of distress in major sectors of theeconomy Often, however, when (demand-pull) inflation is up, unemployment is down

Figure 4: U.S Inflation, year-over-year change, three measures (1990 – 2011)

Figure 5: U.S Unemployment Rate and Inflation (1960 – 2011)

Although core measures of inflation (excluding food and energy) are low, cost-push inflation isreturning in the form of high commodity prices, particularly energy Transportation and foodprices are the most sensitive to energy prices Energy prices are rising for two reasons In theshort-run, energy demand is up following the world-wide recovery from the recession In thelong-run, the rapid economic growth of China and India along with the arrival of peak oilproduction, spell nothing but higher energy costs In other words, it is the return of stagflation

Figure 6: Gasoline Price In 2011 Dollars

Figure 7: Food-Price Index (1980 – 2010)

Since both Gasoline price and Food price are indexed to inflation, it is necessary to compare the

1980 to 2010 period While food prices are not yet back to the all-time high of 1980 as energyprices almost are (with the exception of the 2008 speculative bubble), just remember that it maytake a while for high energy prices to push up other prices.If peak oil really has arrived, energycosts will act as a dead-weight drag on the economy each time it recovers and demand returns

III CAUSES

1 GENERAL CAUSES

Economists offer two principal explanations for why stagflation occurs

First, stagflation can result when the productive capacity of an economy is reduced by anunfavorable supply shock, such as an increase in the price of oil for an oil importing country.Such an unfavorable supply shock tends to raise prices at the same time that it slows theeconomy by making production more costly and less profitable

Second, both stagnation and inflation can result from inappropriate macroeconomic policies Forexample, 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 labormarkets, either of these factors can cause stagflation Excessive growth of the money supplytaken to such an extreme that it must be reversed abruptly can clearly be a cause Both types ofexplanations are offered in analyses of the global stagflation of the 1970s: it began with a hugerise in oil prices, but then continued as central banks used excessively stimulative monetarypolicy to counteract the resulting recession, causing a runaway wage-price spiral