Tuesday, June 14, 2011

Stagflation - a look back or forward?



Back before the Great Recession, I put together the following blog about fears of stagflation and thoughts about when it first appeared. This was written pre-Stimulus and pre-quasi-recovery (the latter of course is expected to kick inflation into high gear). Now, with stagflation fears freshly appearing, I thought it appropriate to revisit this.





With economists presently nearly evenly divided [in 2008] on whether the U.S. economy is headed toward/already in a recession, the Associated Press weighed in Feb. 27 [2008] with an opine that the dreaded "stagflation" appears to be re-emerging. It didn't take a Nobel Prize-winning economist to predict that inflation would jump up, what with double- and triple-digit increases in gas, rising food prices because corn and other commodity food stuffs are being used for gas, and higher medical costs because (in part) Boomers are getting older and not dying off. So what does this mean?

Stagflation, of course, represents an unsavory economic condition where prices skyrocket while the national (these days, global) economy sputters. Kind of hard to manage if you happen to be President, given that economic incentives can ignite even further inflationary responses.

With the "me first" recession and stagflation predictions swirling around, this takes one back to the Nixon era, where the Administration was then battling the chaos fomented by the 1960s "guns and butter" economic policies of then-abhorred deficit federal spending (sound familiar in 2008 with Katrina and Iraq?). In the unstable summer of 1971, the British Ambassador to the U.S. showed up at the U.S. Treasury with an uncomfortable question: "I have $3 billion in American dollars here," he purred. "Would it be too much trouble to convert that into gold?"

With more than three decades between us and the summer of 1971, not too many probably remember top-of-mind that the United States used to be on the Gold Standard, with U.S. gold trading at the now-incomprehensible price of $45 or so an ounce. Lots of Treasury folks at that time probably grabbed their bottles of Rolaids in response to the English request. The United Kingdom at the time had yet to be bailed out from the discovery and subsequent pumping of lucrative North Sea oil, and her Majesty's former empire was then well on its way to collapsing into Second World economic and political status.

As Nixon wrote later in his Autobiography, "Whether we honored or denied this [British] request, the consequences of our action would be fraught with danger: if we gave the British the gold they wanted, then other countries might rush to get theirs. If we refused, then that would be an admission of our concern that we could not meet every potential demand for conversion into gold."

So Nixon not only left the Gold standard and floated the dollar in August of 1971, he - in his words - "proposed a series of economic controls and reforms that left even long-time wage and price control advocates breathless."

The long-time Adam Smith-thumping Conservative President apparently had an near-instantaneous conversion into a disciple of John Maynard Keynes. Nixon lamented that Eisenhower handed the country over to Kennedy in 1960 with an annual rate of inflation around an unbelievable 1.5%, but that it had ballooned up to 4.7% - a then-unthinkable level.

The floating and subsequent devaluing of the dollar was met with considerable scorn: the venerable economist Arthur Burns, then the chairman of the Federal Reserve Board, argued that "Pravda [the then-influential Soviet newspaper] would write that this was a sign of the collapse of capitalism."

It all seems silly today, but back then it was real stuff. I was an 18-year-old traveling in Japan at the time Nixon devalued the dollar, and I remember wondering how my hard-earned U.S. greenbacks could drop 20% in value overnight!

But it got worse. When I returned from Japan, I found that Nixon - against all odds -had triggered the legislation the Democratic Congress had handed him, and instituted real-time wage and price controls. It took two whole years for the U.S. economy to completely return to private control and market trends.

Today, it's not just about the U.S., as The Economist magazine points out this week. Japan's "Lost Decade" of financial travesty in the late 1980s and early 1990s transformed that nation into something-less-than-happy. Virtually every sector - minus the oil-rich nations armed with Sovereign Wealth - has its own set of challenges. Given the productivity numbers and even with the greed-fueled losses in the U.S. housing market, it seems odd that the American economy would at this point choose to collectively jump off a cliff. If you can completely explain the complexity of today's global economy, I'd like to hear it. Meanwhile, we don't have wage and price controls yet, and we do have an unemployment rate in Indiana (slightly over 4%) that many Hoosier politicians would have killed for a few years ago [Within a few months of this first publishing of this blog, Indiana's unemployment rate jumped to more than 10%, as of this writing it's still around 9%]. The point? Let's go compete.

0 Comments:

Post a Comment

<< Home