The Stagflation Threat

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The US economy came to a screeching halt in the final quarter of 2007 and now, as we move into 2008 with a stalled economy we’re facing an old fiend call stagflation, something which we haven’t seen since the waning days of the Carter administration in the 1970’s.

An economy in stagflation has prices going up while the economy is in a recession. This sets of a vicious cycle where paychecks and business earnings are over stretched due to high prices both at the retail and wholesale levels while jobs become harder to find and businesses can’t make ends meet and close.

Right now, we’re seeing prices rise at a pace that hasn’t been seen since 1981. On Tuesday, a government report showed wholesale prices rose 7.4 percent in 2007. Even economists who painted a pretty picture about the economy are beginning to  admit that we are in a slowdown.

In a typical recession, when the economy stalls inflation eases as well. This usually help cushion the impact of a recession and bring about a quick recovery when government stimulus programs take effect. However, in an economy that is stagflationary, the stimulus packages typically only cause the problem to get worse.

Recovering from a period of recession mixed with high inflation is quite difficult. People tend to cut back on their spending as they are faced with rising prices and shrinking wages. Businesses, who have to deal with both rising costs and declining customer demand, respond freezing hiring and postponing capital investment.

Of course, a stagflationary economy is nightmare scenario for Wall Street, business owners, politicians and the general public. The hero that is supposed to save us from this disaster is the Federal Reserve. But the Fed, led by Federal Reserve Chairman Ben Bernanke, has made the situation worse, not better.

The mission of the Federal Reserve is to support economic growth. To help the economy weakened by the credit crunch in housing and high oil prices, they have been dropping the key interest rate. Another cut is anticipated in March. But, in order to deal with inflation, the Fed should boost rates instead of lowering them to spur economic growth.

In the long run this means that Ben Bernanke and his fellow Fed members will have to raise interest rates greatly to stop inflation. This will cause considerable economic pain when it happens because it will greatly slow the economy. That is why my prediction is that we will have several years of stagflation and severe recession.

It is expected that the Fed, for the near term, is much more likely to keep lowering rates than to raise them. However, their own revised forecast indicates that there will be slow economic growth and high inflation in 2008 as well as high unemployment and record business closures if they stay on this path.

Here are some key signs that we are entering into a period of Stagflation:

  • Consumer prices went up 4.1 percent last year, the largest increase in 17 years.
  • Average wages decreased 1.4 percent in 2007.
  • Home heating oil and gasoline prices have been increasing faster that other parts of the economy.
  • Oil prices have gone over $100 a barrel and are posed to break records.
  • High energy prices spur inflation throughout a weakened economy.
  • Consumer sales in January were the lowest in 40 years.
  • Food prices are rising greater than the average amount of inflation
  • The housing credit problems continue to feed the problem.
  • The job market is becoming tighter
  • WalMart is reporting declining sales.
  • Upscale merchants are reporting significant loses and some, like Sharper Image, are closing their doors.
  • Employers eliminated jobs at a rate not seen in over 4 years during January

Can we avoid a nasty period of severe stagflation? In my opinion, we cannot. I believe we will soon be facing double digit inflation and an unemployment rate of 8 percent or hire. For small business owners, this will mean trouble as well as people who can’t find work stop buying while wholesale prices rise higher and higher.

This entry was posted on Friday, December 1st, 2017 at 8:53 pm and is filed under Business Trends, Recession. You can follow any responses to this entry through the RSS 2.0 feed.

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