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Stagflation 2011: Why It Is Here And Why It Is Going To Be Very Painful
Stagflation 2011: Why It Is Here And Why It Is Going To Be Very Painful
Courtesy of Michael Snyder at Economic Collapse
Are you ready for an economy that has high inflation and high unemployment at the same time? Well, welcome to "Stagflation 2011". Stagflation exists when inflation and unemployment are both at high levels at the same time. Of course we all know about the high unemployment situation already. Gallup's daily tracking poll says that the U.S. unemployment rate has been hovering around 10 percent all year so far. But now thanks to rapidly rising food prices and the exploding price of oil, rampant inflation is being added to the equation.
Normally inflation is a sign of increased economic activity, but when the basic commodities that we depend on to run our economy (such as oil) go up in price it actually causes a slowdown in economy activity. When the price of oil goes up high enough, it fundamentally changes the behavior of individuals and businesses. Suddenly certain types of economic activities that were feasible when oil was very cheap are not profitable any longer. When the price of oil rises to a new level and it stays there, essentially what is happening is that more "blood" is being drained out of our economy. Our economy will continue to function when there are higher oil prices, it will just be a lot more sluggish.
In some way, shape or form the price of oil factors into the production of most of our goods and services and it also factors into the transportation of most of our goods and services. A significant rise in the price of oil changes the economic equation for almost every business in the United States.
Today, the price of WTI crude soared past 100 dollars a barrel before closing at $98.10. The price of Brent crude increased 5.3 percent to $111.25. The protests in Libya are certainly causing a lot of the price activity that we have seen over the past few days, but the truth is that oil has been going up for a number of months. Right now we are only seeing an acceleration of the long-term trend.
Things are likely to get far worse if the "day of rage" planned for Saudi Arabia next month turns into a full-blown revolution. Up to this point, the revolutions that have been sweeping the Middle East have been organized largely on Facebook, and now there are calls all over Facebook for the "Saudi revolution" to start on March 20th.
That date is less than 4 weeks away. If Saudi Arabia plunges into chaos, the price of oil is going to go through the roof.
A rapidly rising price for oil is really bad news for the U.S. economy, because it is going to mean lots of inflation. Unfortunately, this also comes at a time when the economy is also feeling the inflationary effects of more quantitative easing by the Federal Reserve.
So if rising oil prices are going to cause more inflation and if rising oil prices are also going to cause our economy to become even more sluggish, what does all of that add up to?
It adds up to stagflation.
Wikipedia defines stagflation in the following manner....
In economics, stagflation is the situation when both the inflation rate and the unemployment rate are persistently high.
This is going to rapidly become the "new normal" for America. High oil prices are going to cause the cost of just about everything to go up, and high oil prices are also going to cause the economy to slow down thus making the unemployment numbers even worse.
It is going to be just like the 1970s all over again.
Only worse.
Economists differ as to how much rising oil prices affect U.S. GDP, but almost all of them agree that rising oil prices do cause a decline in U.S. GDP at least to some extent.
If American families have to spend $10 or $20 more each time they visit a gas station, that means that they are going to have less discretionary income. They won't be able to spend as much at the stores.
Not only that, but since the price of oil affects the price of almost everything else, Americans will find that their dollars have reduced purchasing power.
An oil crisis would force American families to stretch their already overburdened budgets even farther.
So where is the price of gasoline going from here? Well, the average price of gasoline in the United States is rapidly sneaking up on the $3.20 a gallon mark. Almost everyone believes that it is going to be going significantly higher.
Tom Kloza, the chief analyst for the Oil Price Information Service, was recently quoted in USA Today as saying that he believes that the average price for gasoline in the United States will reach somewhere between $3.50 and $3.75 a gallon by April.
As I wrote about yesterday, there are other analysts that believe that we are going to see $4.00 gasoline in the United States by the end of the year, and there are some that believe that we could see $5.00 gasoline if revolution sweeps Saudi Arabia.
If gasoline becomes that expensive and it stays there for a while, it is going to seriously start affecting the behavior of American businesses and American consumers.
Just remember what happened back in 2008. Andrew Busch of BMO Capital Markets recently told CNBC the following....
"Remember when oil was last at $140 (a barrel), Americans reacted and cut the amount of miles they drove."
Can you imagine what it would do to the economy if millions of Americans start sitting in their homes instead of doing their normal amounts of driving and flying?
In addition, one of the biggest problems with a higher price for oil is that it would cause our trade deficit to explode. According to the U.S. government, more than half of the oil that we use is imported. So every month we send the rest of the world billions and billions of our dollars and they send us massive amounts of oil. We rapidly consume all of the oil they send us and we continually need more. So we keep sending larger and larger amounts of money overseas and they keep sending us larger amounts of oil. In the process, our national wealth is being drained at an astounding rate. It is one of the greatest transfers of wealth the world has ever seen.
When the price of oil rises substantially, the transfer of wealth accelerates. This is a very bad thing for the U.S. economy. For example, when oil prices were above $100 a barrel back in 2008 our trade deficit for the year was almost 700 billion dollars.
It would be great if the Middle East would settle down and oil prices would start declining because that would really help out the U.S. economy. Unfortunately, it does not look like that is going to happen. Instead, it appears that we are steamrolling directly towards stagflation. Anyone that lived through the stagflation of the 1970s knows that it is not a lot of fun.
The cold, hard reality of the matter is that without cheap oil our lifestyles are going to change. Our economy was not set up to run on expensive oil. If oil moves well above $100 a barrel and it stays there it is going to bring about significant societal changes.
For the rest of 2011, the price of oil will be the number one economic indicator to watch. If it gets too high it is going to be an absolute disaster for the U.S. economy.
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Oscillating slope downward as regular oil price shocks cause demand destruction, leading to lower oil prices, leading to somewhat better economic conditions, causing the oil prices to rise again.
Lather, rinse, repeat.
We need other energy sources or we're fucked. But it's not exactly easy coming up with anything to replace oil.
according to LINDSEY WILLIAMS we do have another energy source ! GULL ISLAND / ALASKA ! ... capped reserves just waiting to go . of course, big oil doesn't want to just give it away to AMERICANS; they are going to deliberately drive up the price of oil to $200 & then open those capped wells !
I encourage everyone to listen to Williams. We are being herded.
Not one person in 500 seems to get it, congratulations...
Williams has been exactly on target with the oil price cycle for years now, apparently because his sources really are big insiders. Gull Island oil could keep the US energy independent for 200 more years, if Williams has the real info; and so far, IMHO he has displayed that he does have the real info. When the cap comes off or why it has been on for so long I don't know, but I do know ignoring what Williams has to say is a dumb idea.
This reply is to all of you above who think we have unlimited energy capacity. Please watch or read if you like: 8 part video lecture...basic math required.
http://www.albartlett.org/presentations/arithmetic_population_energy_vid...
Read if you want:
http://www.albartlett.org/presentations/arithmetic_population_energy_tra...
We (USA) have tons of energy. A lot of it is on Fed Land. Wonder why the Dems lock stuff up on Fed Land for the Saudis? Right now there is a natural gas boom all over the USA especially in southern Txas is the Eagle Ford basin. They are building 3 more pipelines just to handle the supply.
We have at least 4 LNG terminals that were built for mega bucks. We were gonna import from Russia, Quatar and a few other places. We may actually export it to Europe or China.
On the economy - post the 2008 election - the next day people with money shrugged like Atlas. They cut back, laid off, cancelled any growth plans and hunkered down. They are doing nothing until he is gone. They are starving the beast. I have seen it with my own eyes for at least a dozen business and people with a good amount of money. These people are wealthy and will remain wealthy because they are smart. They are not hiring or expanding. Nothing will happen in the economy until late 2012. If he remains it will be another 4 years or more..
Yep, Freddie, and I am in on it. $$$
~Misstrial
Damn straight freddy, but don't confuse REAL energy facts with politics. BOTH parties continue to speak for the international banking cartel. Until that tie is finally severed nothing changes. Just look at the comments from Goldman Sachs yesterday and the GOP behavior after taking back the house of representatives. Goldman says austerity is "bad" - of course it will stop government POMO and end all those fees that are paid for by the taxpayer. The GOP still won't touch defense, medicare, medicaid, or social security spending and my guess it they don't have the balls to block a vote on raising the debt ceiling. The real issue is about getting good compensation to people who are actually worth a shit and not simply financial scumbags pushing paper around. Look at how much the percentage of our GDP the "financial sector" now represents. It is not sustainable. The financial sector remains the cancer the needs to be removed before it kills all the other sectors of the economy. Crash the system, crash it now, only then will compensation find it's way to the true innovators and people that are actually worth a shit.
+ Laws
The only companies that I know that are hiring are those sucking on the government tit.
Nope, mining companies are hiring. Exploration companies are hiring.
IT companies are hiring. Intel building a 1B$ facility in AZ.
Ag is hiring in Cali.
~Misstrial
masturflation - don't want to see it, but I'm as ready as I can be.
Starvflation
I agree that we seeing higher oil prices, but consumers aren't going to pony up more cash to spend. That's a critical ingredient for any stagflationary episode to occur. What will happen will be just like 2008. Oil and food prices will keep going up (particularly oil for the US) until the whole economy short-circuits and we fall back into recession. Stock markets will tumble, consumers will be cautious once again. By the end of the year, deflation will be debated, not inflation imho.
We have not yet gotten out of an inflationary depression that started in 2008, IMHO. It will morph into a hyperinflationary depression soon, again IMHO. The phony economic propaganda spewed out by official sources should be an insult to the intelligence of anyone of 8 years old. All that is required to keep the blinders on Joe and Jane Sixpack for a while longer is the incredibly naive notion that the USA is immune to the laws of mathematics. The country is bankrupt and its central bank is furiously increasing the money supply as a misguided remedy. Bug, meet steamroller. There is no happy ending. There is a hyperinflationary sequence as in Ben Bernanke tries to out print the debilitating effects of $150/bbl crude, and then there is no stopping the crash of the dollar.
I certainly can see the threat of a "hyper-depressionary" situation in the future if our Fed continues these ridiculous policies. But the reason will be China's secular growth causing all commodities to rise.
I wrote about it here (sorry for the blog-whoring), but I really did begin a great deal of interesting commentary.
http://rcsinvestments.wordpress.com/2010/09/22/a-hyper-depressionary-sta...
The country is not bankrupt. We can't and don't pay our bills because we refuse to tax the only people who can afford to pay them. Only by properly taxing (PAYGO) can you acquire fiscal discipline. If you can deficit spend and use the hidden taxation method of inflation, you will never have the proper discipline.
But we also need to realize our monetary system is debt-based. Without ever-increasing levels of debt, it will collapse. If all our debts, public and private, were paid, there would be no money left.
And in other news, the brave crew of deflationists aboard the Fantasia, led by Bob Prechter and Karl Denninger, continue their voyage in the quest to be the very first to sail to the edge of the flat earth, rumored to lie just beyond the Isles of Economic Delusion, the Strait of Monetary Ignorance, and the mythical Sea of Fiat Eternity. Foolishly, they neglected to take their charts showing the dangers of the Golden Shoals, the Maelstrom of Manipulated Silver, and the bottomless depths of the Abyss of Governmental Debt.
Nice bit of sarcasm.
However, you just need to look at Japan, and indeed the Great Depression, to see that it is you (goldbugs?) who have swallowed hook line & sinker the inflationary myth.
This is NOT inflation in any sense of the word, it's just another bubble, and like the tech & housing bubbles, this one too will burst. One only has to glance back to 2008 to see how quickly these bubbles burst.
Don't be a sheep, be more open-minded.
You believe the gov't CPI figures? Say, I think there is a bridge in Alaska somewhere that you might be interested in.
This whole thing will end up the way of that bridge you speak of, as well as the shit head senator that tried to have it built.
Whereas the Brooklyn Bridge is still available, to one and all. Look how Bernie Madoff did taking tolls from it.
I don't think you understood the basic argument here:
Significant stagflation requires a price-wage cycle of: higher wages causing higher prices causing higher wages causing higher prices causing higher wages causing higher prices causing higher wages, etc.
If you do not understand that then there's not much I can do for you.
The whole 'stagflation' notion here on ZH is stillborn: unemployment is high and there's no COLA adjustments for even those who are employed.
The US experienced a stagflationary cycle in the 70s:
http://lh5.ggpht.com/_VgJQTp0Bsf0/TUgwIeY_oPI/AAAAAAAAAIo/ojOzqCOCthk/un...
Check that graph to see how core CPI was increasing gradually as well. Today core CPI is stubbornly low - mostly because services, wages, housing prices are deflating.
What might realistically occur is a combination of three things:
But ZH has to stick to the failed Austrian/monetarist dogma that an increased supply of money has to mean radically higher inflation, trying very hard to ignore the gaping hole on the wages and aggregate demand side of the equation, right? :-)
Welcome to the Austrian/monetarist concept of redistribution of wealth: by only giving new wealth to those who already have it.
The idea that you cannot have inflation without wage inflation is absurd.
There may be some wage inflation in positions that have a shortage of qualified workers, but those positions are few and far between. With high unemployment (and let's be real, unemployment is much higher than 10%) there is not much necessity for employers to offer higher wages. Especially if their other costs are going up.
And... he's back! MCT with his straw men, distortions, and misreadings of history.
No, to have stagflation, you do not have to have a rising price-wage cycle. You merely have to have declining economic activity, and monetary inflation (monetary expansion greater than economic activity). That is our present situation.
You deflationists are mislead by your obsession with the higher M numbers in your understanding of how money chases goods. Money generated via fractional reserve lending chases goods bought via that lending - eg, dotcom shares in the late 90s, houses more recently. This drives up the prices of those assets in particular.
So as lending decreases, we will see less money chasing those goods and their prices will be bid down. We will experience price deflation in those assets.
Expanding the monetary base, however, means more money chasing goods not bought via credit.
Your reliance on CPI to tell you we are not experiencing inflation is very telling. It tells me you are utterly divorced from the real world.
Conflating Austrian economics and monetarism is either the height of ignorance or of duplicity, but either way - FAIL.
And as we have not been operating under either an Austrian or monetarist system, and wealth inequality has exploded, what does that tell us about your statement:
Welcome to the Austrian/monetarist concept of redistribution of wealth: by only giving new wealth to those who already have it.
Troll.
Another thing adding to the inflation side of stagflation is disruptions of supply when throughout the supply chain people aren't certain when to buy or sell.
Since no one knows what their next cost will be, hoarding is rampant, shortage of critical parts slows or stops jobs, leading to increasing costs and less employment.
Overtime, Stagflation leads to Hyper Inflation and double digit interest rates.
In the 1970's, solid businesses, with even modest debts, struggled as the cost of money got out of control.
I don't think the Bernank's lip was quivering because he drank too much coffee.
Excellent post, ignore the junk, I did it accidentally trying to reply (using my left hand for the mouse and it's not going well :-) - sorry.
Meridian click on it again and you can unjunk him
Thanks for the tip.
I agree. In 2008 gas prices rose rapidly and the real economy had a heart attack. There seems to be a school of thought that raising gasoline more slowly will actually be good for the economy. This appears to be yet another FED “thought experiment” that will end in failure. Since the FED and their friends don’t pay the cost of these experiments, they’ll continue.
>higher wages causing higher prices causing higher wages causing higher prices causing higher wages causing higher prices causing higher wages, etc.
>If you do not understand that then there's not much I can do for you.
Classical economics is so myopic. Higher costs of inputs, causes lower margins, causes industry collapse, causes scarcity of goods, causes higher costs. Less goods equals higher prices, simple supply and demand - economics 1H. You can have price inflation without wage inflation its called a drop in the standard of living.