"Is stagflation back?"
I hate this phrase that is popping up in the financial press, because stagflation is a myth, so it can't come back. Everytime you see somebody refer to the 1970s as "stagflation" (a period of stagnant growth and high inflation) you should think, "this person is lying to me." Because the 1970s were a period of higher economic growth than the subsequent decades of 80s, 90s, 00s, and 10s. The 1970s were not a period of stagnant growth.
Generally, inflation is associated with faster economic growth, because prices go up during periods of high demand, and these higher prices create an incentive to create more supply.
Yes, inflation is higher than in decades right now, but also, real GDP grew faster during the past 12 months than it has since 1950. So the general association is true here -- current inflation is associated with current faster economic growth. There was no stagflation in the 70s, and there is no stagflation now.
Normally, it is the attempts to reduce inflation that slow down the economy by producing a recession. The higher interest rates that central banks use to reduce inflation slow down the economy, that's how you reduce inflation, by slowing down the economy. Instead of referring to "stagflation" we should be referring to "stagnation caused by increasing interest rates", or perhaps "stagration", where the central bank in effect "rations" the money supply to reduce both inflation and GDP.
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The only other periods of high inflation since WW2 have been -- immediately after WW2 in the late 40s and early 50s -- and the 1970s.
To kill off the high inflation of the 1970s we had to endure double-digit interest rates for a while.
But the high inflation of the late 40s and early 50s went away without much of an interest rate hike at all, Treasury Bills did go up to 2.25% from the wartime low of 0.38%, but 2.25% for an interest rate is pretty darn normal.
It seems the Federal Reserve and financial markets think the current high inflation will go away with barely an interest rate hike at all, the futures market expects the Federal Funds rate to increase from 0.08% now to 0.34% next October -- one 1/4% increase by the Fed sometime next summer or fall.
But now I'm starting to see the financial commentators argue over which scenario we're currently in -- 1952 or 1979. Will we get out of this with a minor increase in interest rates, or will we need a major one?
There are so many differences between 1952 and 1979 and 2022 that I could spend much of the morning comparing and contrasting, but we do not have a scenario where inflation this high goes away even though the Federal Reserve does nothing at all, which is the Fed's current plan -- to wait it out. But the "wait it out" people say this time is different because of the pandemic. But the "wait it out" people also don't explain how the 40% increase in the money supply will magically go away when the pandemic does, without any action by the Fed to remove that money from the economy.
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The inflation of the early 50s was snuffed out via much higher income taxes (92%!!) and higher interest rates, which reduced demand and led to a recession.
The inflation of the 70s was snuffed out via much higher interest rates (16%!!), which reduced demand and led to a recession.
The inflation of the early 2020s will be snuffed out via much higher taxes and/or much higher interest rates, which will reduce demand and lead to a recession.
That's how this stuff works. And it has nothing to do with "stagflation", which does not exist.
Generally, inflation is associated with faster economic growth, because prices go up during periods of high demand, and these higher prices create an incentive to create more supply.
Yes, inflation is higher than in decades right now, but also, real GDP grew faster during the past 12 months than it has since 1950. So the general association is true here -- current inflation is associated with current faster economic growth. There was no stagflation in the 70s, and there is no stagflation now.
Normally, it is the attempts to reduce inflation that slow down the economy by producing a recession. The higher interest rates that central banks use to reduce inflation slow down the economy, that's how you reduce inflation, by slowing down the economy. Instead of referring to "stagflation" we should be referring to "stagnation caused by increasing interest rates", or perhaps "stagration", where the central bank in effect "rations" the money supply to reduce both inflation and GDP.
-----
The only other periods of high inflation since WW2 have been -- immediately after WW2 in the late 40s and early 50s -- and the 1970s.
To kill off the high inflation of the 1970s we had to endure double-digit interest rates for a while.
But the high inflation of the late 40s and early 50s went away without much of an interest rate hike at all, Treasury Bills did go up to 2.25% from the wartime low of 0.38%, but 2.25% for an interest rate is pretty darn normal.
It seems the Federal Reserve and financial markets think the current high inflation will go away with barely an interest rate hike at all, the futures market expects the Federal Funds rate to increase from 0.08% now to 0.34% next October -- one 1/4% increase by the Fed sometime next summer or fall.
But now I'm starting to see the financial commentators argue over which scenario we're currently in -- 1952 or 1979. Will we get out of this with a minor increase in interest rates, or will we need a major one?
There are so many differences between 1952 and 1979 and 2022 that I could spend much of the morning comparing and contrasting, but we do not have a scenario where inflation this high goes away even though the Federal Reserve does nothing at all, which is the Fed's current plan -- to wait it out. But the "wait it out" people say this time is different because of the pandemic. But the "wait it out" people also don't explain how the 40% increase in the money supply will magically go away when the pandemic does, without any action by the Fed to remove that money from the economy.
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The inflation of the early 50s was snuffed out via much higher income taxes (92%!!) and higher interest rates, which reduced demand and led to a recession.
The inflation of the 70s was snuffed out via much higher interest rates (16%!!), which reduced demand and led to a recession.
The inflation of the early 2020s will be snuffed out via much higher taxes and/or much higher interest rates, which will reduce demand and lead to a recession.
That's how this stuff works. And it has nothing to do with "stagflation", which does not exist.