Archive for Wednesday, February 27, 2008

Worries grow for evils of ‘stagflation’

February 27, 2008


— It's worrisome math: Slowing economic growth plus soaring prices could eventually equal "stagflation."

That's a toxic economic brew the nation hasn't tasted in three decades.

Already, paychecks aren't stretching as far, and jobs are harder to find, threatening to set off a vicious cycle that could make things even worse.

The economy nearly stalled in the final three months of last year and probably is barely growing or even shrinking now. That's the "stagnation" part of the ailment. Typically, that slowdown should slow inflation as well - the second part of the diagnosis - but prices are still marching higher.

The latest worrisome news came Tuesday: a government report showing wholesale prices climbed 7.4 percent in the past year. That was the biggest annual leap since 1981.

"We're in a slowdown," Press Secretary Dana Perino said at the White House, where the economics talk was still upbeat until recently.

Once the twin evils of stagflation take hold, it can be hard to break the grip. People cut back on their spending as they are stung by rising prices and shriveling wages. Businesses, also socked by rising costs and declining demand from customers, clamp down on their hiring and capital investment.

That would be a nightmare scenario for Wall Street investors, businesses, politicians and most everyone else. They're already looking to the Federal Reserve for help, but the Fed's job is complicated by the situation.

The mission of Federal Reserve Chairman Ben Bernanke and his colleagues is to nurture economic growth and keep inflation under control. To brace the teetering economy, the Fed since September has been ratcheting down its key interest rate. Another cut is expected in March. However, to combat inflation, the Fed would be expected to boost rates instead.

"The Fed has its hands full. It is preoccupied with the economic slowdown at the front door, but inflation looks to be sneaking in the back door," said Greg McBride, senior financial analyst at "If that trend continues, the Fed would need to show the economy some tough love, meaning higher interest rates to keep inflation from getting out of hand."

On the other hand, Brian Bethune, economist at Global Insight, said Bernanke can fight only one war at a time, and the more pressing issue right now is to shore up the ailing economy. "That's the war that needs to be fought. The war on inflation will have to come another day," Bethune said.

Maybe things won't be so bad. Stock prices rose for the day, continuing a recent mini-rally. The Dow Jones industrials closed up 114.70 points. And Federal Reserve vice chairman Donald Kohn said in a speech that he doesn't expect the recent elevated inflation readings to persist.

"But the recent information on prices underlines the need to continue to monitor the inflation situation very carefully," he added.

Some numbers underscore the concerns:

¢ Prices paid by consumers were up 4.1 percent last year, the biggest increase in 17 years. Those higher prices - especially for heating homes and filling up gas tanks - are taking an ever-bigger bite out of paychecks. Workers' weekly earnings are down 1.4 percent from January a year ago when adjusted for inflation.

¢ Oil prices galloped past $100 a barrel to close at a record $100.88 on Tuesday. Those lofty energy prices are a double-edged sword: They can spread inflation through the economy by boosting the prices of lots of other goods and services, and they can leave people with less money to spend on other things, thus slowing overall economic activity. There are signs high energy prices are causing some damage on both of those fronts.


Mkh 10 years, 3 months ago

Stagflation is what every American should be worried about right now. This is the number one issue, we are on the verge of a serious economic meltdown and stagflation is what will drive it. This is far more important than KU basketball games or discussing your worst hair cut, or whatever nonsense Obama and Hillary are bickering about.

The Fed is shredding the dollar and it's not going to stop. The international community is dumping the dollar and that will be the final blow that cripples the economy and permanently alters your way of life. Inflation is skyrocketing far higher than what the government reports and it will get worse as the Fed continues to cut interest rates.

Plan now. Plan now. Plan now.

Get your money out of anything remotely risky.

The bottom is falling out and fast.

Mkh 10 years, 3 months ago

Alan Greenspan, who pretends to be acting in the best interest of Americans, was the other day actually telling the Arab nations to give up the dollar. They have already been slowly doing it for a while, but when it fully happens, that will be the end of the stock market.

The stock market is already much lower than it seems do to the historic low dollar and inflation. The true value of the market right now is about 800, and dropping.

Dollar hit another all time low...Gold hit an all time high.

Do I have to spell it out?

Mkh 10 years, 3 months ago

guess so....

Oil is back at $100...this is mainly due to the dollar, but will explode the inflation/stagnation problem, as the article briefly alludes to.

Gold hit $965 this morning, now at $951 and climbing back up. And this is with the IMF dumping huge amounts of gold on the world market in an attempt to keep the price down. Guess what, it's not working. The major gold producers are buying back their futures as fast as possible. Gold will explode.

Commodities are exploding as well.

The Fed is signaling another rate cut, which will send the dollar down even further. That means You loose money by holding it...the Fed is stealing your savings.

The state Governors just held a conference in Washington demanding another bailout, this time for them. Guess where that is going to come from? Another rate cut. But it won't stop there, the rates will continue to drop all the way down, this is exactly what they did before the Great Depression, except this time it will be worse since we no longer have any domestic manufacturing....

Bank profits have plunged 84%. The banks are in serious trouble and are scrambling for their lives as the housing market continues to bomb and spread....

Mkh 10 years, 3 months ago

posessionannex (Anonymous) says:

"Hmmm, maybe we should try what worked "three decades ago."

In the '70s interest rates had to go above 20% before inflation began to curve. We are going the other way currently.

Mkh 10 years, 3 months ago

The main reason the Fed won't stop the interest rate slashes is because they are in the midst of a massive bailout for the financial community that incredibly over-expanded itself. This is coming at the great expense of middle and lower classes.

Mkh 10 years, 3 months ago

I agree. However "Corportism" is all the rage these days. It's time we got sound money back and told the Fed to F---- themselves.

Mkh 10 years, 3 months ago

No of course not...I have a problem with the Government and the Economy being merged together. I have a problem with corporate special interests dictating government policy as well as the government dictating business policy. I have a problem with corporate welfare. I have a problem with the military-industrial complex. But I have the biggest problem with the central bankers of the federal reserve system.

gogoplata 10 years, 3 months ago

Here is someone who knows how to fix this problem. From this morning.

Godot 10 years, 3 months ago

MKH is right; Bernanke is using the Fed to prop up the banks; lowering of the Fed rate benefits the banks because that is the rate that banks pay to borrow money from the Fed. It has nothing to do with the rate that the banks charge for loans. The market determines that.

Mortgage rates are higher than they were before the rate cuts, and credit card interest rates are pushing 30%, even for people with good credit.

Y'all better be reading every piece of mail you get from your credit card companies, or you may get a very unpleasant surprise when you see your interest rate double or triple.

Haiku_Cuckoo 10 years, 3 months ago

Ford has eliminated 32,000 jobs in the last two years, and plans to cut more. But it's not just jobs that it's getting rid of. The real target is more troubling: middle-class wages. As the Times puts it, Ford is a company "that long offered middle-class wages for blue-collar jobs." That deal is now coming to an end.

Yep. Ford lost $12.7 billion in 2006 and yet their CEO (Lawrence, KS's own Alan Mulally) received over $28 million for his first four months on the job. My conscience won't allow me to do any more business with a company like that. If they're cutting corners on employee wages, one can only imagine what shortcuts they're taking in the manufacturing environment.

jonas 10 years, 3 months ago

Godot: It is my understanding that the lowering of fed rates is primarily to spark aggregate investment spending, not to assist with consumer-type personal loans. Those are, as you mentioned, more directly determined by the current market condition.

It's funny, but I'm pretty sure the federal reserve existed both during the economic downturns and the economic booms for the last bit of modern history. If they are so directly responsible for one, they should be directly responsible for both, ne? Maybe they're not so directly responsible.

acoupstick 10 years, 3 months ago

Since the upper class were the primary beneficiaries of the current administration's tax cuts, perhaps they could do their patriotic duty and spend us out of the current stagflation/inflation. Trickle-down economics can work?!

Mkh 10 years, 3 months ago

Jonas ponders:

"It's funny, but I'm pretty sure the federal reserve existed both during the economic downturns and the economic booms for the last bit of modern history. If they are so directly responsible for one, they should be directly responsible for both, ne? Maybe they're not so directly responsible."

The Fed is responsible for the boom and bust cycle. That is what they do. In most recent history we saw the "boom" during the late nineties, however the rapid expansion of credit which caused that "boom" is the primary reason we are seeing the "bust" now.

As long as the Fed operates as it does, we will never escape the boom and bust cycle...which is why fiat currency really doesn't work, except for the central bankers and ultra wealthy.

Mkh 10 years, 3 months ago

gogoplata (Anonymous) says:

Here is someone who knows how to fix this problem. From this morning.

As Dr. Paul points out here, just in the last two years there has been $4.3 trillion injected into the economy...this is why the problem will only spread.

It's always interesting to watch something like the Democratic debate where each candidate is promising to deliver the moon to the people, or the neo-cons discussing how they will occupy the middle east indefinently...but never explaining to people where exactly that money will come from. It's a neat card trick.

Mkh 10 years, 3 months ago

Dr. Paul whooped the stuffing out of Bernanke yesterday...

"Inflation comes from the unwise increase in the supply of money argue that we can continue to debase the currency, which is really the policy of that you're following, purposely debasing value of currency - which to me seems so just puts more pressure on the federal reserve to create capital out of thin air in order to stimulate the economy and usually that just goes into mal-investment," said Paul.

"History is against you," Paul told Bernanke, "History is on the side of hard money - if you look at stable prices you have to look at the only historic sound money that's lasted more than a few years - fiat money always ends, gold is the only thing where you get stable prices," he added, pointing out that despite the price of oil's rapid ascent, it had remained flat when compared to the price of gold."

"I cannot see how we can continue to accept the policy of deliberately destroying the value of money as an economic value," said Paul, adding that the policy was "immoral," and would lead to a reduction in American's living standards and "the middle class being wiped out."

Godot 10 years, 3 months ago

jonas, someone else agrees with my position that the Fed actions are a boon to the banks:

""What people are realizing is that the interest-rate cuts haven't helped anybody but the banks," said Michael Cohn, chief investment strategist at Atlantis Asset Management. "They're taking these rate cuts and pocketing the money ... to shore up their own balance sheets."

See full story here:

Godot 10 years, 3 months ago

I wish Dr. Paul would run as a third party candidate. He is the only person running for office that has a clue about what is going on in our monetary system.

jonas 10 years, 3 months ago

mkh: Are you suggesting that there were not economic cycles before the creation of the federal reserve?

jonas 10 years, 3 months ago

godot: I'm sure that you can find people to agree with your position. Knowledgeable people, too. If you look, you can find plenty that disagree as well.

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