Stagflation in the u s

Combine high inflation and high unemployment and you have stagflation.. If that happens, individual earning power will evaporate, and our standard of living will decline….” Obviously, we

From a global perspective, the picture only looks worse As we havedebated how much money to borrow and spend in hopes of jump-starting our economy, we’ve ignored the worldwide stimulus binge.China, Europe and Japan are all spending hundreds of billions of dollarsthey don’t have in hopes of speeding up their economies, too Thatmeans the very countries we have relied on to buy our bonds, notablyChina and Japan, are now putting their own bonds on the global creditmarkets.

It seems that no one in Washington is discussing what happens when theworld begins this gargantuan borrowing spree How high will interestrates rise? And more fundamentally, who will have the money to buyour bonds? It is possible that the Federal Reserve will succumb topressure to “monetize” our debt — that is, print new money to buy ourbonds In fact, the Fed is already suggesting that it will buy long-term

Treasury securities in order to lower borrowing costs If it does, then ourmoney 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 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 borrowand 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 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 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

definiton of stagflation Besides, a deep analyse is made on the factual situation of the 1970s Great Stagflation and more recently, especially themain 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 theeconomy that exhibits elevated unemployment rates and inflation at thesame time Typically, stagflation presents serious problems for monetarypolicymakers, since the remedies for high unemployment are nearlydirectly opposed to the remedies available for inflationary cycles Mosteconomists believe stagflation can be attributed to either failed economicpolicies or to destructive or catastrophic events that seriously affect theproduction capability of the overall economy During the 1970s, forinstance, the United States experienced a prolonged period of stagflationdue primarily to shortages of raw materials Livestock feedmanufacturing was significantly impacted by the loss of the Peruviananchovy fishery in 1972, but the most significant economic factor waslikely the oil crisis of 1973, when OPEC severely limited theinternational oil supply in order to control prices and boost profits fortheir members

Regardless of its origins, stagflation is likely to cause significant andprolonged economic problems that cannot be easily resolved Highunemployment reduces the overall buying power of consumers andcompanies, and increasing prices lessen that buying power even more.This can put a financial squeeze on both the consumer and the corporatesector and cause still more unemployment as companies try to

compensate for lower profits, increasing expenses and the resultingreduction in financial liquidity.

II FACTS

1. STAGFLATION IN THE 1970s

People often refer to the 1970s stagflation as ‘the badold days’ When they think of the U.S economy inthat 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 economicindicators, including Economic Growth Rate, Inflation Rate andUnemployment Rate, in order to identify Stagflation in this period of UShistory

a Historical Economic Growth

The 1970s were perhaps the worst decade of most industrializedcountries', including the U.S.’s economic performance since the GreatDepression Although there was no severe economic depression aswitnessed in the 1930s, economic growth rates were considerably lowerthan postwar decades between 1945 and 1973 U.S manufacturingindustries began to decline as a result, with the US running its last tradesurplus (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 and graph, in the 1970sand 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

Annual Current-Dollar and "Real" Gross Domestic Product

billions

ofcurrent

dollars

GDP inbillionsofchained2005dollars

RealGrowthrate

%

GDP inbillionsofcurrentdollars

GDP inbillionsofchained2005dollars

RealGrowthrate

b Historical Inflation Rates

Table 2 shows Inflation Rate data for the USA during the time

1959-2000, including monthly and annual rates Year over Year compares thegrowth rate of the Consumer Price Index (CPI-U) from one period to thesame period a year earlier

The oil shocks of 1973 and 1979 added to the existing ailments andconjured high inflation throughout much of the world for the rest of thedecade Before the year 1970, annual inflation rates mainly stayed below3% However, at the start of the new decade, the figure had more thandoubled itself 10 years earlier, then slowing down at around 4% in thefollowing 2 years In 1974, there was a sharp rise in US inflation ratewhen it reached its highest of 11.04% in the last 15-year period Thebuying power of money decreased remarkably and consumers were notwilling to buy anymore From 1975 to 1978, the rate went betweenrelatively high levels of 7.6% and 9.1%, before reaching a double-digitfigure again in 1979, breaking the 1974 record and soar to a new peak of13.5% in 1980 In late 1980s, the situation became stable with the ratebeing kept under 5%.

0.9709% 1.2945% 1.6181% 1.6181% 1.9355% 1.6077% 1.9355% 1.6077% 1.9293% 1.6026%2.5641% 2.5559% 2.8662% 2.8662% 2.5316% 2.8481% 3.4810% 3.4810% 3.7855% 3.7855%2.8125% 2.8037% 2.4768% 2.7864% 2.7778% 2.7692% 2.4465% 2.7523% 2.4316% 2.7356%3.9514% 3.9394% 3.9275% 3.9157% 4.2042% 4.4910% 4.4776% 4.4643% 4.7478% 4.7337%4.6784% 5.2478% 5.5233% 5.5072% 5.4755% 5.4441% 5.7143% 5.6980% 5.6657% 5.9322%6.1453% 5.8172% 6.0606% 6.0440% 6.0109% 5.9783% 5.4054% 5.6604% 5.6300% 5.6000%5.0000% 4.7120% 4.1558% 4.4041% 4.6392% 4.3590% 4.6154% 4.0816% 3.8071% 3.2828%3.5088% 3.5000% 3.4913% 3.2258% 2.7094% 2.9484% 2.9412% 3.1863% 3.4230% 3.6675%3.8741% 4.5894% 5.0602% 5.5288% 5.9952% 5.7279% 7.3810% 7.3634% 7.8014% 8.2547%

10.0233% 10.3926% 10.0917% 10.7062% 10.8597% 11.5124% 10.8647% 11.9469% 12.0614% 12.2004%11.2288% 10.2510% 10.2083% 9.4650% 9.3878% 9.7166% 8.6000% 7.9051% 7.4364% 7.3786%

6.2857% 6.0721% 6.0491% 6.2030% 5.9701% 5.3506% 5.7090% 5.4945% 5.4645% 4.8825%5.9140% 6.4401% 6.9519% 6.7257% 6.8662% 6.8301% 6.6202% 6.5972% 6.3903% 6.7241%6.4298% 6.5546% 6.5000% 6.9652% 7.4135% 7.7049% 7.8431% 8.3062% 8.9286% 8.8853%9.8569% 10.0946% 10.4851% 10.8527% 10.8896% 11.2633% 11.8182% 12.1805% 12.0715% 12.6113%

14.1823% 14.7564% 14.7309% 14.4056% 14.3845% 13.1327% 12.8726% 12.6005% 12.7660% 12.6482%11.4068% 10.4869% 10.0000% 9.7800% 9.5526% 10.7618% 10.8043% 10.9524% 10.1415% 9.5906%

7.6223% 6.7797% 6.5095% 6.6815% 7.0640% 6.4410% 5.8505% 5.0429% 5.1392% 4.5891%3.4884% 3.5979% 3.8988% 3.5491% 2.5773% 2.4615% 2.5589% 2.8601% 2.8513% 3.2653%4.5965% 4.8008% 4.5639% 4.2339% 4.2211% 4.2042% 4.2914% 4.2701% 4.2574% 4.0514%3.5156% 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: inflation-rate.php?form=usair

http://www.rateinflation.com/inflation-rate/usa-historical-Figure 2: U.S Annual Inflation Rate (1959-2000 Year-over-Year)

Figure 3: U.S Unemployment Rate (1960-2000)

As previously analyzed, we can see that the period of late 1970s andearly 1980s is a typical example of stagflation of the economy, which isthe combination of low growth rate, in other words the “stag”, togetherwith high inflation and unemployment rate, or the “flation” in the term

By the time of 1980, when U.S President Jimmy Carter was runningfor re-election against Ronald Reagan, the misery index (the sum of theunemployment rate and the inflation rate) had reached an all-time high

of 21.98% The economic problems of the 1970s would result in asluggish cynicism replacing the optimistic attitudes of the 1950s and1960s Faith in government was at an all-time low in the aftermath ofVietnam and Watergate, as exemplified 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 the economy could not suffer from both highunemployment and rapid inflation at the same time Unfortunately, theKeynesians 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 duringthe economic slump of the late 1970s and early 1980s More seriously,there is a fear of stagflation return

According to the The Wall Street Journal from February 2008, “TheU.S is facing an unwelcome combination of looming recession andpersistent inflation that is reviving angst about stagflation, a conditionnot 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 outsharply rising food and energy costs, prices rose 0.3% in January, driven

by education, 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 of stagnation andinflation

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 thatcould signal the return of stagflation (cost-push inflation during periods

of weak economic growth and slack demand) See the FRB of Clevelandweb 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 theunemployment rate added to the inflation rate When either is high, there

is some level of distress in major sectors of the economy 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) arelow, cost-push inflation is returning in the form of high commodityprices, particularly energy Transportation and food prices are the mostsensitive to energy prices Energy prices are rising for two reasons Inthe short-run, energy demand is up following the world-wide recoveryfrom the recession In the long-run, the rapid economic growth of Chinaand India along with the arrival of peak oil production, spell nothing buthigher energy costs In other words, it is the return of stagflation.

Figure 6: Gasoline Price In 2011 Dollars