Just wondering if I can live through it again by RickH
(libertarian)
Saturday, January 19, 2008
In a moment of aimless web browsing, I encountered an item that left me wondering whether or not it was information that I really wanted to know. Steven Leser says that after a thirty year absence "stagflation" has returned to the US economy. I am old enough that terminology employed thirty years ago is not unfamiliar, but sometimes the clarity of its significance has dulled. Mr. Leser's mini-bio doesn't proclaim any expertise as an economist, so I decided a refresher course was probably in order.
According to the Wikipedia entry, stagflation describes:
a period with out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually a recession.
The article goes into great detail about its causes and solutions; make that solution (singular); there is apparently only one. More on that later.
The Wikipedia editors have flagged the entire article as too dense and jargon-filled for Wikipedia readers, and I can't disagree with that. It reminds me of an old parody of Wordworth's poem, The Old Oaken Bucket, which describes the water as "clear as the verses of Byron."
I am almost certainly even less economically educated than Mr. Leser, but a few points in Wikipedia were clear enough to capture. For example:
There are a number of competing theories as to the root cause of stagflation but all are similar, attributing the phenomenon to disruptive forces acting on normal free market conditions. These forces may include a supply shock such as a real or relative scarcity of raw materials, improper applications of monetary policy, poorly constructed tax codes or government regulations, or anything else that interferes with free-market resource allocation.
One doesn't have to be an economist to recognize that those conditions are rampant in today's economic crisis.
In the 70's (that thirty year old presage of current events) the main thing I remember was that times were difficult indeed for working people. High unemployment, extreme inflation, interest rates around 20%, 2-3 block lines at gasoline stations, etc. It was actually a very good financial time for me. I was fresh off the hippie streets, freshly married, and instilled with a new sense of responsibility. I got a little education at the local trade school in the accounting field and snapped up one of the cushy government jobs which was really the only employment available. My salary was tied to the inflation rate which meant big cost of living raises every year, and with no credit history, borrowing money wasn't an option for me if I had wanted it. Those were the days. Now, as a retiree on a fixed income, things don't look so rosy.
In those days, I had not yet been jaded by the political system whose corruption I was generally aware of, but I was young and assumed that like everything else it could be brought under control. After all, we had just gotten rid of Richard Nixon, the AntiChrist, and his evil pardoner, Gerald Ford. Jimmy Carter, an honest man, was in the White House. Ronald Reagan, the wicked pretender to the throne was safely on the distant horizon ... Things were apparently looking up.
Ah! the deceit of appearances. Actually, to this day I respect Jimmy Carter, and I make no apologies for that. As the political and economic situation went to hell in a handbasket, I blamed Paul Volcker and the Fed (in cooperation with the shadow government whose backstage influence had finally reached my consciousness) for engineering his destruction with arbitrary actions intended to discredit the interloper and remove him from office. From my more enlightened current perspective, I can see that Carter was just the unlucky stooge who got thrown into an unwinnable situation. Much like Herbert Hoover in the days just prior to the great depression which presaged the advent of FDR who got four terms to finally end that difficult period by the destroying the gold standard and propelling the nation into World War II.
By 1980, I recognized that for the good of the country, Carter had to go, and it was probably Reagan's turn. I couldn't really deal with that on a personal level, so I changed my voter registration to Libertarian, and vowed to work from outside the system. Reagan was no hero to me, but he was an inspirational fellow who made people feel good about living in an America with an improving economy, which he came along just in time to get the credit for. Unfortunately, as Ron Paul has noted, his big talk about real conservatism turned out to be just that. Talk. His economic theory was to take every cent he could and pour it into the military industrial complex before congress could waste it on something else. The theory was that the USSR would have to match our military investment, and we would see who went broke first. That theory worked. The USSR collapsed, while the American economy continued to roar full steam ahead. Reagan, himself, descended into a fog of semi-awareness allowing Oliver North and the rest of the neocons to run around causing all manner of mischief. He never did lose his ability to give a great speech, though.
By the time Reagan was gone, the corporate world had the bit firmly in it's teeth, and the US government has become the junkyard dog which protects it. Now the economic wheel has turned and we're back to the financial situation that Jimmy Carter faced thirty plus years ago. The next President will very likely be forced to confront those issues again. Whoever it is might be wise to call the peanut farmer in for a heart-to-heart talk about his retrospective thoughts regarding the question of whether the cure for stagflation can be survived politically. I hope the new president will have the backbone to set in motion economic policies which will protect my children from a similar situation in a few more decades. My choice for the candidate most likely to succeed in that effort is Ron Paul. I believe that he would care much less about serving a second term than the opportunity to have a four year bully pulpit to promote real change to stabilize the economy to a point that subsequent governments would take much longer to destroy it.
So ... how do you cure stagflation? I looked at several articles turned up by Google and while many people hate to say so, it appears that there is only one solution. The one that Paul Volcker used. As far as I know he's still alive. He also would be an worthwhile contributor to that "heart-to-heart" conversation with the new president.
Again, a quote from the Wipkipedia stagflation article regarding it's solution ...
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."
And from the Wikipedia biography of Paul Volker ...
Paul Volker was appointed Chairman of the Federal Reserve in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan. Volcker's Fed is widely credited with ending the United States' stagflation crisis of the 1970s by limiting the growth of the money supply, abandoning the previous policy of targeting interest rates. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. The change in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression.
However, Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922) due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street and blockading the Eccles Building.
Additional reading about Carter and Volcker exposes activities much less noble than their commitment to ending the stagflation crisis of the 1970's, but I would certainly like to hear their reminisces on that particular issue, and their recommendations for handling it today.
Are you ready for 3-5 years of 20% interest rates, 10% unemployment, and 15% inflation? It's the only known cure!
Did you like this article? If you did, Thumb It! 10
thumbs so far
The views expressed
in this article are those of RickH only and
do not represent the views of Nolan Chart, LLC or its affiliates.
RickH is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Your article is a bit unclear as to its point. Is it a criticism and warning on Federal Reserve policy, a fond tripdown memory lane or an advocation of major change to the current system?
I'd like to clarify that FDR's policies did not in any way contribute to the end of the Great Depression. In fact, had FDR not broken every campaign promise he made, the Great Depression might not have been so "great" in scope. FDR was the great socialist destroyer of America. If one does not understand this, taking a moment to read The Revolution Was by Garet Garrett may dramatically change your worldview. Note that that essay was written in 1938, before the internet and the easy ability to research the misdeeds and hidden agendas of past leaders.
As for Reagan, I believe he had many of the best ideas in mind for the American people. I also believe he was led astray by his advisers and handcuffed by his increasing disconnect with reality through the progression of his Alzheimer's. Ron Paul is the early promise of Reagan, except he would actually force many of his proposals through where Reagan hesitated.
Listening to Reagan's early speeches you'll see the similarity between the two. However much Paul is not a polished actor, the message is the same. Small government, civil liberties and sound fiscal management. No other candidate is addressing these issues. Every major candidate will cause an increase in government, more spending, stealth tax and fee increases and an increased trade deficit. None will restore our rights as affirmed in the Constitution. You'll see USA PATRIOT Act III and NAFTA squared. You'll see more unnecessary warfare and more corporate welfare. You'll likely see blowback from our actions as those Mideast countries we're occupying become ever more bothered by our presence on their soil. You'll see an economy suffering and inflation rising unencumbered by any backing to the dollar and the likelihood of a downgrade in the credit on our debt. I ask of the public, what man but a fool would knowingly ask for these things?
Your article is a bit unclear as to its point. Is it a criticism and warning on Federal Reserve policy, a fond trip down memory lane or an advocation of major change to the current system?
It's actually all those things, but intended primarily to be a reminder that even with Ron Paul in the White House (unlikely as that may seem), our economic woes will not be solved quickly. Even bringing home all the troops will be an initially expensive operation, and will contribute to the unemployment factor. All that money being redirected at home will be an inflationary factor. I believe that Paul's policies will get us through it with the most speed and the least pain, but if stagflation is truly back, things are going to be quite messy for a while under the best of circumstances.
...and, I do agree with your comments about FDR. He was a commie at heart, and would never have gotten us out of the economic mess without WWII. But, my how the common folks loved him. Could it be that we really do need an elite ruling class to make the hard decisions about what's best for the country?
Posted By: Jahfre Fire Eater
Date: 2008-01-19 15:32:05
I thought stagflation was term invented by government economists to hide the reality of an inflationary recession. No matter what it gets called or how it is defined it is coming. Like a freight train; bigger and badder and faster than ever before.
We all get what's coming whether we deserve it or not. Preparation, not outrage, will determine who survives and who thrives during the near future that is not at all like the recent past. Coming soon to a life near you.
Tips: Safe water supply.
Dry goods to last 6 months...that's about how long it will take Wal-Mart shoppers to eat everthing in sight, including each other.
Bullets: handguns for the top scavengers as they come by. Rifles for the edible game come winter.
Gold: for the future of commerce.
Everyone in your home should know how to use all these things in your absense. Its the least you can do.
I too lived through the 70's and remember clearly the pain of the 80-82 recession in Michigan. Towns like Flint and Pontiac had unemployment rates equal to those during the Great Depression. At the time I thought Volker would destroy the country in his effort to save it, but save it he did despite the weeping and rending of garments coming from the populace.
The patterns all around us today are earily similar as you pointed out. I have been a coin collector from a small boy, and so always tracked the ebb and flow of gold and silver in the economy. The surges up, accompanied by quick pull-backs, only to run up again are exactly what happened in those days. The comments by most pundits that it was only temporary and manipulation of interest rates and the money supply by the Fed would solve everything sound exactly like what we hear today.
From what I've been reading by The Bank Credit Analyst, Stratfor, and John Mauldin, I believe the big problem isn't going to be in 2008. Much like anyone heading toward bankruptcy, last ditch efforts will be made...maxing out credit lines and calling in favors. The real serious downturn due to all of the imbalances in the economy will be 2010 -2011. It's uncanny how for decades things have gone south at the turn of the decade.
Anyway, that's how I'm playing it. Not to say everything will be rosy for the next two years, but I think we have a little time until the crash.
For the most part I don't believe there will be bands of marauders in the streets, but there will be problems and unless you live far out in the country it would be adviseable to be prepared. To that point, an interesting list of 100 key things that may come in handy in such a situation can be found http://www.thepowerhour.com/news/items_disappearfirst.htm
If nothing becomes of all of the problems we all see, the list of items noted would still be handy just to have around.
The real serious downturn due to all of the imbalances in the economy will be 2010 -2011.
Even if they can hold it off that long, this upcoming president will have to deal with it. If he wants a 2nd term, I think he'd be better off to trigger the solutions immediately. Hopefully, then, things could be looking up economically by 2012. The longer they wait to face up to it, the longer will be the recovery period.
There is one, and only one, cure for stagflation: Federal deficit spending will cure the "stag" and raising interest rates will cure the "flation." For a detailed explanation about why this works, see www.rodgermitchell.com
I think there is one big difference between 70-80 stagflation cure and 2010 scenario. Nobody really know how much the collapse of USSR contributed to the happy end of Volcker-policies and Dollar recovery and how it would end otherwise. to my knowledge 90s economy is an anomaly and did not behave as most economist have expected, most likely because of the global growth that used dollar for their reserves.
It wont be the same this time. There is too many independent well positioned global players that will most likely not all collapse at the same time or be easy to manipulate, on the other side, Canada has world largest oil reserves that could change the global picture and make it easier for US to preserve status quo.
But I agree, interesting times are ahead. Your experience input is very much appreciated I am much younger and don't remember 80s at all. I read every comment with great interest as I am trying to prepare myself for the difficult times ahead.
I think there is one big difference between 70-80 stagflation cure and 2010 scenario. Nobody really know how much the collapse of USSR contributed to the happy end of Volcker-policies and Dollar recovery and how it would end otherwise. to my knowledge 90s economy is an anomaly and did not behave as most economist have expected, most likely because of the global growth that used dollar for their reserves.
It wont be the same this time. There is too many independent well positioned global players that will most likely not all collapse at the same time or be easy to manipulate, on the other side, Canada has world largest oil reserves that could change the global picture and make it easier for US to preserve status quo.
But I agree, interesting times are ahead. Your experience input is very much appreciated I am much younger and don't remember 80s at all. I read every comment with great interest as I am trying to prepare myself for the difficult times ahead.
