Ross Gittins: Stagflation Fears Are Nonsense

June 13, 2008
Stagflation? History shows the fears are nonsense

One reason to learn economics is to get a handle on what's worth worrying about and what isn't. You don't need to know a lot of economics to know the possibility of simultaneously worsening inflation and rising unemployment isn't worth losing any sleep over.

You certainly don't need to know a lot of economics when you visit Zimbabwe. There's 85% unemployment and nearly one million percent inflation. I certainly sleep better knowing that what they are going through is nonsense.

To me, a tell-tale sign of incomprehension is anyone who says we're headed for stagflation. You know they're too young to have lived through the stagflation of the 1970s and so know what it really is, what caused it and why it's highly unlikely to happen at present.

I've apparently been a tell-tale sign of incomprehension since 2004. It is/was my belief that negative real interest rates (conveniently ignored in his analysis) create vast hoarding opportunities. Further, I would argue that the "present" has been nearly a decade so far. Very few investments have kept up with the price of gold over the last nine years. Next up, toilet paper?

Most of the silly talk we hear of stagflation arises simply because it takes time for a change in direction to work its way through the economy. Because there's a relatively brief lag before slowing demand leads to a declining inflation rate.

Here's some "silly talk" Ross Gittins was offering in 1999. Too bad he didn't mention stagflation fears back then. It would have been a fantastic time to embrace stagflation whole-heartedly (i.e., invest in oil, gold, and silver). He was too busy writing how great things were instead.

June 12, 1999
Australia's "golden age" of prosperity ... and poverty

The headline on a comment by the Sydney Morning Herald's economics correspondent summed it up: “Just why we've never had it so good”. The article's underline, however, went on: “Sure the ‘60s were great. But, writes Ross Gittins, if you stop looking in the rear vision mirror, you'll see the ‘90s are even better.”

The “rear vision mirror” refers to the social and human price being exacted by these processes. Output, productivity and profits are soaring, benefitting a thin privileged layer, precisely through the destruction of jobs, living standards and social conditions for the majority of people.

Two days after the “golden age” report was released, the latest labour force statistics showed that full-time employment is continuing to fall. Economists and business commentators had confidently predicted that the current 4 percent annual economic growth would translate into a rise of up to 50,000 in employment levels during May. Instead, the total number of people employed increased by just 1,000. Part-time employment rose 7,500, but full-time fell by 6,500. Moreover, another 15,700 people gave up looking for full-time work. The official unemployment rate remained unchanged at 7.5 percent.

Perhaps the "golden age" was to be taken literally. You could have bought gold for a mere $260 an ounce in June of 1999. It is now $891.

So let's sum this up. My fears are nonsense. I'm incomprehensible. I'm silly. I should stop losing sleep. Oh how I wish I could do the latter.

I'll try to remember that when I'm paying 18% higher medical insurance premiums starting in August (which I am). Instead, I'll write a letter to my insurance company explaining that since unemployment is picking up what they are doing is nearly as nonsensical as what is going on in Zimbabwe. I'll write a similar letter to China and explain that they must continue to send us even cheaper goods and must immediately stop using the paper money we send them (in exchange) to buy oil. It is nonsense! That money was best kept buried in a secret chest never to be seen again!