It Is Different This Time

Stagflation Could Be Making A Comeback, But It Is Different This Time Around

It is different this time? Okay. Convince me. I'm all ears. I should point out that I will be particularly skeptical based on the particular phrase though. "This time it is different" has a lousy track record. It is similar to betting on the glue horse to win.

First, this stagflation is far less severe. Compared with the 70s, Shapiro said, unemployment is far less. And the inflation rate is nothing like the double-digit rates seen during the disco era.

As the stagflation of the 1970s grew worse, I'm confident that there was a time in the 1970s when its severity matched our current situation. What's to stop this current stagflation from becoming more severe? Unemployment is rising and the employment reports continue to show job losses. Then there is inflation. Even after oil's selloff this week, it is still substantially higher than this time last year. The future price of goods will no doubt have at least some of that baked in. Import prices even excluding oil aren't looking all that good. Due to our massive and unsustainable trade deficit, import prices should be even more of a concern to us than in the 1970s.

So, what is ahead? Shapiro said the Fed should hope economic growth picks up enough in the next several months to justify raising interest rates to kill inflation. If that does not happen, he said, perhaps the slowdown itself will be enough to keep prices from rising too much.

Hope? Seriously? Based on what?

The first scenario has growth miraculously pick up somehow. The good news is that if growth picks up the Fed can squash it with rising interest rates? That's the good news? Won't that just put a fork in housing? Too bad housing already has about 17 forks stuck in it already (just a "crude" ballpark estimate).

The second scenario has growth continue to slow down. We already know what the government's response will be. It seems likely that more money will be printed in the form of tax rebate checks. In my opinion, that really kick started the price of oil higher. Everyone loves free money but it was the oil traders who loved it most.

If neither of those scenarios comes to pass, policymakers might have to make some very tough choices.

Well, he made it fairly clear that those two scenarios were based on hope. My bet is on this last option. Neither is just predicting more of the same. Policymakers have been having to make some very tough choices for the past decade. I don't see much that will change it going forward. Surprisingly, Bernanke did want the job though. Go figure.

For now, Shapiro said, the government’s economic stimulus package seems to be having a positive effect. But the effect probably won’t be long-lasting and could have the effect of “papering over” some of the economy’s problems.

The last paragraph of the article (presumably the conclusion) uses the "positive effect" of printing more money and "papering over" to show why it is different this time? Needless to say, I think I shall remain stagflationary for yet another day (week, month, year, and/or lifetime). And lastly, if the effect probably won't be long-lasting as he suggests, then why should the Fed be hoping for a pickup in economic growth? I'd really like to know.