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U.S. Stagflation Fears Overblown
Topic Started: Apr 16 2008, 04:04 PM (168 Views)
Dandandat
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Time to put something here
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U.S. Stagflation Fears Overblown

The combination of slowing growth and rising inflation has raised the specter of "stagflation," a pernicious problem in the U.S. in the 1970s and early 1980s. Stagflation is puzzling to economists because slowing growth should mean weakening demand for labor, lower wage inflation, and softer product demand. This, in turn, should mean falling inflation--not rising inflation.

1980 Precedent
The year 1980 epitomized the stagflation process. Real GDP fell by a sharp 1.6%, meaning that a serious recession was taking place. The unemployment rate jumped to 7% in 1980 from 5.8% the year before. Yet on top of this economic weakness, consumer price index (CPI) inflation accelerated to 13.5% from 11.3% the year before.

Recently, similar trends in the data have renewed U.S. stagflation fears:

--CPI inflation was 4% in February; the annualized rate of inflation was 4.7% over the previous six months--up from a 3.5% annual rate of inflation in the six months ending August 2007, and the 2.6% year-on-year rate of inflation as of December 2006.

--The unemployment rate has crept upward, from 4.5% in May 2007 to 4.8% in last month.

--The pace of job creation has eased sharply from 175,000 net new jobs per month in 2006 to 107,000 jobs per month in the first half of 2007 to 76,000 jobs per month in the second half of 2007. In January and February of this year, an average of 43,000 jobs per month were lost.

--Meanwhile, commodity prices have soared. The price of gold has recently breached the $1,000-per-ounce mark--up from around $650 in January 2007. Oil prices have broken $100 per barrel barrier and the Goldman Sachs commodity price index has recently surged to an all-time high.

Overblown Fears
Any assessment of the prospects for stagflation depends heavily on a theoretical understanding of the inflation process. Some economists believe that price shocks--like oil surges and rising food prices--can boost underlying inflation. However, most say that inflation spikes rarely become persistent if higher prices do not become embedded in workers' wages. Accepting this latter view, there are reasons to believe the current surge in inflation may be temporary.

Wages Contained
For all workers, total compensation was up 3% in the 12 months ending December 2007--less than the 3.1% increase in the 12 months ending September 2007.

Absent Danger Signal
The wage demands of the most technically sophisticated and skilled workers (those in management, professional and technical occupations) are a key indicator. When labor markets become tight and wage inflation starts to become a problem, it is the wages of these workers that show inflationary trends first, before the population at large.

To date, there is no evidence that the wages of highly skilled workers are accelerating. In the 12 months ending December 2007, total compensation for these workers was up 3.2%--less than the 3.4% increase experienced in the 12 months ending September 2007 or the 3.5% increase they enjoyed in the 12 months ending December 2006.

Productivity
Combined with the 1.6% annual productivity gains for the economy in 2007, these wage patterns suggest an underlying, annual "inflation impulse" into the U.S. economy of just 1.5% per year (roughly 3% wage gains, less 1.6% productivity gains).

Changed Labor Market
Another key difference between the current period and the late 1970s and early 1980s is that labor markets have changed dramatically:

--Union Decline. In the earlier period, unions represented approximately 20% of the labor force, and were often successful in pressing for higher wages, even in the face of slowing economic conditions. Just 12.1% of U.S. workers are currently members of unions, and union bargaining power has been significantly reduced.

--Few COLAs. A related factor is that cost-of-living adjustments (COLAs) were a feature of labor markets in the late 1970s and early 1980s, when approximately 60% of union workers enjoyed COLA benefits. These COLA provisions made inflation difficult to combat, because it quickly worked its way into wages, which had subsequent effects on future inflation. Today, few workers have COLA clauses in their contracts, meaning that there are few automatic links between inflation and wages.

http://www.forbes.com/markets/2008/03/20/e...0321oxford.html
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Dandandat
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Time to put something here
So your crappie raise is a good thing this year, remember that the next time you complain to your boss for more money. :P
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Hoss
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Don't make me use my bare hands on you.
raze? what did I demolish?
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Dandandat
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38957
Apr 16 2008, 05:45 PM
raze?  what did I demolish?

:P what are you talking about?
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Admiralbill_gomec
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Dandandat
Apr 16 2008, 04:04 PM
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I agree with the article, regarding the premise. The idea of stagflation would have been mentioned were this not an election year. It is just the press trying to create traction for a non-news story. I'm glad Forbes posted some facts rather than add to any overblown hysteria.

I'm waiting to see someone repeat the line, "This is the worst economy in 50 years!"
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Dandandat
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Admiralbill_gomec
Apr 17 2008, 12:58 PM
Dandandat
Apr 16 2008, 04:04 PM
Quote:
 

I agree with the article, regarding the premise. The idea of stagflation would have been mentioned were this not an election year. It is just the press trying to create traction for a non-news story. I'm glad Forbes posted some facts rather than add to any overblown hysteria.

I'm waiting to see someone repeat the line, "This is the worst economy in 50 years!"

I don't agree, I think this article would have been written regardless of an election year. Its not as if the professionals aren’t up about the current economic down turn, the same issues being disused on main street are being discussed on wall street. There for it is not simply unintelligent hysteria that is driving the speculation.

Further more, in the general population it is not the fact that the media has hipped the issue that has worried people about the economy, although it doesn't help. People have been hit in three very important places, their home value is down, the cost of living has gone up, and their easy accesses to credit has gone away. Now this alone does not bring the macro economy to a stand still. But it does hurt the individual who doesn’t know or care about GDP or trade deficits. To these people the economy is their house and their eggs and when these things are disturbed they are going to believe things are worse then they might other wise be.

Add to that the increases in lost jobs and its more understandable why the individual thinks the economy is doing badly.

The media simply picks up on this fear and amplifies it.
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Admiralbill_gomec
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Dandandat
Apr 17 2008, 12:02 PM
Admiralbill_gomec
Apr 17 2008, 12:58 PM
Dandandat
Apr 16 2008, 04:04 PM
Quote:
 

I agree with the article, regarding the premise. The idea of stagflation would have been mentioned were this not an election year. It is just the press trying to create traction for a non-news story. I'm glad Forbes posted some facts rather than add to any overblown hysteria.

I'm waiting to see someone repeat the line, "This is the worst economy in 50 years!"

I don't agree, I think this article would have been written regardless of an election year. Its not as if the professionals aren’t up about the current economic down turn, the same issues being disused on main street are being discussed on wall street. There for it is not simply unintelligent hysteria that is driving the speculation.

Further more, in the general population it is not the fact that the media has hipped the issue that has worried people about the economy, although it doesn't help. People have been hit in three very important places, their home value is down, the cost of living has gone up, and their easy accesses to credit has gone away. Now this alone does not bring the macro economy to a stand still. But it does hurt the individual who doesn’t know or care about GDP or trade deficits. To these people the economy is their house and their eggs and when these things are disturbed they are going to believe things are worse then they might other wise be.

Add to that the increases in lost jobs and its more understandable why the individual thinks the economy is doing badly.

The media simply picks up on this fear and amplifies it.

Not the Forbes article, Dante, but the original talk of stagflation. I first heard it on the radio Monday morning as I was dropping the demonspawn off at school. I read this article as a correction to the attempt at fear generation.

Yes, the economy could be better. It is harder to get credit, and y'know, I think it should be (hear me out).

Banks were pressured to make credit available to certain demographics with a traditional history of lower than average credit. These same people had sub-prime mortgage options waved at them. They looked at this as an opportunity to get a home in a world where the value of homes was steadily increasing. Unfortunately, the double whammy of variable mortgage changes and the peak in the housing market happened at the same time.

The problem is (and I have stated this many times) that people in this country no longer receive basic educations in economics. For some who say, "I didn't know this could happen" they really didn't know. Between that and speculation in real estate, this was going to happen at some time.

The original idea of the sub-prime mortgage was to give people a chance to get equity in their homes, and when the time came to change to a fixed rate or face higher interest rates, found themselves with much higher interest rates. One problem is that they chose too much house. Realtors (and remember, my wife is one) were often pushing the "you're fine as long as your housing costs are less than 29% of your gross income." A lot of people bought into that. Suddenly the scale tips, and they find housing costing say, 35% of their income. Why? Because their credit was still not as good as it could be, despite making house payments, which disqualified many for fixed rate loans at decent rates. My wife uses the 25% of gross income figure when she deals with first time buyers, and also warns that if you get a variable rate mortgage, look for something like a 5/25 type if you can.

The real truth about the sub-prime bubble is that if affected (overall) 6% of homeowners. Problem was that most of these people were recent first-time buyers and at the lower end of the income spectrum.

The housing "bubble" was bound to happen. It had to, even without the sub-prime mortgage problem. You'll see the same with oil this summer, probably in August. That should hopefully ease the ridiculously high speculative prices in the oil industry this year.
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Dandandat
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Bill, I don't understand the need for you above explanation; it all may be true (though I do have disagreements with some of what you said) but it does not speak to your original point that current economic fears are media driven.

As for easy credit, you may be right that it should be less easy to get. But that does not change the fact that for a long time it was easy to get and that many people had factored it into their way of life rather then a finical tool. When it went a way these people found themselves short and they factor that into how they see the economy.

So here they are, there biggest asset (and perhaps only asset) has just deprecated in value (for what ever reason, their fault, the banks fault what ever), their cost of living has gone up (they don’t care or know or believe its only going to be temporary as this article suggests), and they can't get the credit they need to make ends meet. Then they here that unemployment is going up. For this person the economy is bad, it may even be the worst it has been in 50 years.


But I do not agree that Banks where pressured to make credit available to certain demographics with a traditional history of lower than average credit. The government in an attempt to shorten the recession of 2000 made an error in judgment and flooded the market with to much money. Banks took the opportunity to make higher revenue by issuing more loans with that excess of cash. First they went reputable barrowers, but when that well ran dry they moved to less reputable barrowers. They where afflicted with hubris; they came to believe the risk was not as high as the reward. They later found they where wrong. But they where not pressured to do anything, they walked into this pile of dog excrement all by them selves and led a lot of people with them, investors and customers alike. But that’s not even the beginning of the story. The story begins in the 80's when banks found they could use commercial paper conduits to circumvent bank regulations that prohibits them from lending more money then they are able to service. It was not sub prime loans that caused the meltdown in the credit market, it was this method of banking that caused the problem. When the sub prime sh!t hit the fan peoples eyes where opened at their bad practices and they all pulled back. Banks no longer wanted to do business with other banks because they no longer trusted each other. They didn’t trust each other because they knew of the skeletons in their own closets and assumed the other guy had it worse.

The biggest problem I see coming out of the last year is that the underling banking practices problem is not going to be fixed, the banks have effectively weathered the storm at the expense of a lot of people, and so see no need to mend their ways. The government wont fix the problem because Banks are big contributors. I just worry what will happen next time something like this happens and whether banks will be able to pull them selves out of it.
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