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Sunday, January 06, 2008

Are We Headed for Stagflation?

The economic news for the 4th quarter of 2007 is in and it is not good. That’s an understatement of massive proportions, by the way. It's actually dire and in ways that we haven't seen since the intractable combination of recession and inflation, known as stagflation in the 1970s. I'll get to that in a minute. First the current numbers for the 4th quarter and what they mean.

According to reports from newspapers around the country, including the Chicago Tribune, the New York Times and the Washington Post, the unemployment rate surged from 4.7 percent to 5 percent. Economists, even at their most pessimistic, had predicted unemployment would only go up to 4.8 percent. This is the highest unemployment rate we’ve had since the recession of 2001 and the aftermath of the 9/11 attacks, or the immediate aftermath of Hurricane Katrina in 2005.

Only 18,000 new jobs were created. Economists had expected that at least 70,000 new jobs would be added to the economy. And that would have been below what’s needed to keep up with population growth. The economy needs to add 100,000 new jobs a year to keep pace with the population.

Some of the slowdown occurred in the housing sector, as was expected. According to the Washington Post, residential construction lost 28,500 jobs and 7,000 additional jobs were lost in the mortgage industry. As the Washington Post reported:

"We are on the verge of recession now," said Robert A. Dye, senior economist at PNC Financial Services Group. "We are teetering on the edge of a precipice, and it will not take much to push us over."

Economists have been hoping that the fallout from the downturn in housing and related crisis in financial markets would be contained to industries closely related to those businesses. That hope, it would appear, is not being borne out.

Indeed, problems in the housing industry, caused by the subprime crisis, are spilling over to other important sectors. Manufacturing contracted by 3,000 jobs for the quarter. For the entire year of 2007, 212,000 jobs were lost, 74,000 of them in the sagging auto industry.

What is more troubling, though, is that retail lost 24,300 jobs in December. The holiday season is traditionally a time when more jobs are added to the economy, albeit many of them are temporary. That usually skews the 4th quarter report and makes it appear stronger until it is seasonally adjusted. So that actually makes job losses in retail in December even worse news.

All of this would seem to call for an economic stimulus package. Already unions and politicians across the spectrum are agreeing on the need for that. But there’s an even greater problem here. Major newspapers across the country yesterday reported that we may be facing a threat of inflation, which could hamper attempts to stimulate the economy. Here are some quotes:

From the NYT:

“This is unambiguously negative,” said Mark Zandi, chief economist at Moody’s Economy.com. “The economy is on the edge of recession, if we’re not already engulfed in one.

The Fed has already eased rates three times since September in a bid to inject confidence into jittery markets. But analysts cautioned that central bankers may now feel constrained against further easing: inflation is growing, particularly as oil hovers near $100 a barrel. Lower interest rates, over time, can generate the seeds of inflation, and could make an already weak dollar worth less against foreign currencies.

“The Fed is trying to juggle a two-sided sword,” said Ryan Larson, senior equity trader at Voyageur Asset Management. “They’re trying to fight inflation moving higher and they’re trying to fight a slowdown in growth.”

From the Washington Post:

The Fed is in a tricky spot as it decides how much to lower rates. Oil prices touched $100 a barrel Wednesday and Thursday, and have risen in recent weeks with prices of other commodities. Lower interest rates would only exacerbate the threat of higher prices.

"The Fed is in the unenviable position of trying to serve two radically different taskmasters," said Bruce McCain, head of investment strategy at Key Private Bank. Fed Chairman Ben S. Bernanke "can't afford to let market psychology and economic psychology of consumers spin out of control. But we are seeing signs of greater inflation."


And finally, the Chicago Tribune:

The latest figures make it more likely that the Federal Reserve will move to lower interest rates late this month. But the inflationary pressures caused by sky-high oil prices could complicate the Fed's efforts to stimulate the economy with lower rates.

Sorry to be repetitive, but the point needs to be made that across the board economists and business writers fear a resurgent threat of inflation. Which means that we could be headed for something not seen since the late 1970s. Stagflation could be rearing its ugly head again.

The danger in this is that the classic tool for fighting recession is to stimulate the economy by cutting interest rates and pumping more money into the economy. And the classic tool for damping down inflation is to induce some mild recessionary pressure by tightening credit and getting some money out of the economy. Stagflation, however, is particularly nasty and intractable because neither of those alternatives is desirable. As its name suggests, it’s a form of economic paralysis.

The economy could be in dire trouble and so could the Republican Party heading into the 2008 elections. Then again, so could anybody who wins that election and gets stuck having to fix this mess.

8 comments:

Vivian J. Paige said...

The ecomony, the war in Iraq, and all of the other challenges facing our next president make me think that whoever wins will be a one-term president.

tx2vadem said...

Ms. Paige:

I don't know about that. Roosevelt handled worse and he came out okay. It depends on the person and what they do with the time they are given. Roosevelt's strength was his willingness to try new things in stark contrast to Hoover's dogmatic approach. Maybe this will shed some light for the electorate on who they should ultimately choose?

AnonymousIsAWoman said...

Vivian, I wonder the same thing. tx2vadem, actually, Roosevelt didn't face worse. He faced a recession on a massive scale, i.e., a depression.

It was horrendous. But the problem was how to stimulate the economy. There was no inflation problem. He didn't have the economy pulling in two different directions at the same time.

That said, what he did was brilliant and innovative. The jobs creation program, the WPA, Social Security, supporting unions all put in place a safety net which kept our country from constant sudden economic downturns for over seventy years.

I get so tired of all the "free market rhetoric." The totally unregulated markets of the last turn of the century and the 1920s, led to the Great Depression. But even before that, during the Gilded Age there was a tiny middle class and wrenching wage discrepancies between the top captains of industry and their workers. The vast majority of Americans, like their counterparts in England and France, lived in poverty.

There were crime infested slums that make our worst inner cities look like pleasant suburbs by comparison. Alcohol abuse, illegitimate births, child labor, prostitution, crime etc. were rampant in all our large cities.

To get a sense of what day to day life was like in Victorian and Edwardian England (which had an economic system much like ours) read the brilliant book "The Dress Lodger" or anything by Charles Dickens.

What gave us the seventy years of relative prosperity we've had was the Roosevelt reforms, his safety net social programs, strong unions, and a progressive tax rate that didn't give CEOs an incentive to game the system for quick, large profits and golden parachuts.)

I will probably write more about this in the coming weeks. But there's a very good article on it over at Firedoglake at http://firedoglake.com/2008/01/06/why-financial-crises-will-keep-happening/

And read Paul Krugman's NYT columns.

In addition, you can't discount the fact that WWII came along and factories retooled to produce war supplies. Men went to war and women went to work in those factories, putting the labor force at full employment. It was really the industrialization as we geared up for war that helped bring us out of the Great Depression.

Because we no longer have a strong manufacturing base, war would not stimulate the economy in the same way (which may be a good thing in the long run).

But the erosion of manufacturing and outsourcing both contribute not just to unemployment but to wage depression.

Whoever take over will indeed have their work cut out for them!

Vivian J. Paige said...

Ah, but times are different now. We are a society of "what have you done for me lately" folks. Witness the fact that the electorate in Virginia tires within one year of the party in charge of the white house and elects a person from the opposite party for governor. And go back thru the last few one term presidents we've had.

As for what a person does with the time given - well, a president does not operate in a vacuum. He or she will have to deal with Congress. If Congress is unwilling to go along, it ain't happening. That's why we don't have any kind of universal health care right now, that's why we have Don't Ask, Don't Tell.

Washington change is incremental, not bold leaps. Which is why I'd much rather spend my energy on local stuff.

Aimee Fausser said...

Thanks--the economy is ignored far too much lately, and when it is spoken about it is usually from a very elementary understanding, which doesn't solve anything. Glad to see you're looking at this with the kind of attention it deserves.

Vivian J. Paige said...

Because we no longer have a strong manufacturing base, war would not stimulate the economy in the same way
I think the Bushies missed this lesson somewhere along the way.

AnonymousIsAWoman said...

Vivian, I think I'm geared as much, if not more, towards the national because I live so near Washington, DC and the federal government is actually my employer. So that actually makes it local for me :)

And thank you Aimee. I actually wrote quite a lot about the economy in 2005 when I first started.

I think I'll be writing more about it. I genuinely enjoyed working on this piece.

Anonymous said...

Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold 1/2 OF ALL UNITED STATES WEALTH. Unlike 'lesser' estimates, this includes all stocks, bonds, cash, and material assets held by America's richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own 'humanitarian' spin on it. Calling attention to her own 'good will'. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST 1% HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don't fall for all of their 'humanitarian' CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can't just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world's richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars. Transfered FROM US TO THEM. Over a period of about 27 years. Thats Reaganomics for you. The wealth does not 'trickle down' as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They will never settle for a reasonable share of ANYTHING. They will do whatever it takes to get even richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductable crumbs and call themselves 'humanitarians'. IT CAN'T WORK THIS WAY. This is going to end just like a game of Monopoly. The current US depression will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. Crime, poverty, and suicide will skyrocket. So don’t fall for all of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductable contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah, Ellen, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. So don’t fall for their ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTABLE PR CRAP. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. EXTREME WEALTH HAS MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don't believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.