Worried murmurs about stagflation are beginning to be heard throughout the country. The latest numbers on unemployment have it at 5.5%, a jump of .5% in one month. Even supply-side ideologues are starting to realize that it is difficult for consumers to consume when they don’t have jobs, can’t afford to fill up a gas tank ($4.29 a gallon here in New York), have lost their homes, and can’t borrow money. Golly!
So that’s the “stag” part of stagflation. What about the “flation?”
Cost of living
In recent months, the US Federal Reserve has been slashing interest rates in an attempt to stoke growth.
But analysts believe the rising cost of living, rather than interest rates, should be the US central bank’s chief concern now.
“If you want to avoid a protracted recession, you have to make sure inflation doesn’t get out of control,” said Gilles Moec, an analyst at Bank of America.
“Otherwise, you’re going to have a loss of purchasing power meaning consumer spending is going to slow down even more.”
The financial bigwigs are nervous. They know that interest rates cannot stay where they are – the only reason they are so low is to stave off recession during an election year. (Unfortunately, the recession is here anyway. They didn’t count on the ARM crisis exacerbating the effects of the exorbitant oil price hikes.) After the elections are over, the first thing the Fed will do is to raise interest rates exponentially to counter the effects of the recession. This will, of course, cause consumer borrowing to come to a screeching halt. Your house may be worth only 65% of what it was before, but take heart! Anyone wanting to purchase it will have to pay 25% interest on their mortgage. Yippee! No, I’m not exaggerating – this is how the back of stagflation was broken the first time this record was played.
An effective method of addressing stagflation once it occurs is equally elusive. During the 1970s, stagflation persisted in the U.S. despite the government’s best efforts to contain it. The trend was finally broken when the Federal Reserve hiked interest rates to the point where borrowing was impossible for many segments of the economy, and the country fell into a deep recession.
We are in a hell of a mess. Who can get us out of it?
When Raygun was elected, he simply had the Federal Reserve lower interest rates to counter the stagflation recession, and gave everyone a shiny new credit card, including the Federal Government; thereby postponing sound economic policy until Bill Clinton arrived and raised taxes on the wealthy, regulated the banks, and instated “pay as you go” over the vociferous protests of Republican Congresscritters.
But remember, it took him eight years to do so.
No matter who is elected President in November, I believe that the next four years could rival, or surpass, the worst of Jimmy Carter’s greatest hits. It will take a long time to drag the country back from the abyss. We will have to do a lot of things all at once: a New Deal-style program of job creation and infrastructure building and repair; investment in, and promotion of, green energy technologies; bringing troops home from Iraq and Afghanistan (cutting taxes during wartime has been a huge contributor to our economic downturn); an overhaul of the banking and credit systems; and raising taxes on the wealthy to Clintonian levels (at least). All of this will have to be started within the first few months of the President’s first term.
Who do we think has the energy, the know-how, the strength of will, and the plan to get all of this done?
That question should be at the top of everyone’s list this November. I know who my choice is, and I hope that the best candidate gets nominated and elected…whomever she is.