Thursday, June 26, 2008

Stagnation + Inflation = Stagflation

The Birth of the word "Stagflation"
The word stagflation was a portmanteaus introduced in Britain by a member of the Conservative party during a House of Common Speech on 17th November 1965. A portmanteaus are blended words formed by 2 words of different meaning into another unique and new word. Other examples of Portmanteaus are "Bombay + Hollywood = Bollywood", "Medical + Care = Medicare", "Web + Log = Blog", etc

What is Stagflation?
* My title has explain it. It is the state of a country where its economy faces stagnation coupled with a high inflationary situation. Stagnation = Slow or no growth. Inflation = Rises in price.
* In economics, we learn that supply and demand usually come to a point where an equilbrium price is set. But when demand is too fast or supply cannot cope with demand, the price simply cannot come down.
* Example, Short supplies of essential commodities like oil and food or an overheated economy with loose monetary supply that leads of excessive demand and increase in wages. When the economy is supposed to cool down, wages, being downwards sticky couldn't come down and it result in unemployment.
* To deal with the problem, a government have to determine if it need to curb inflation or to prevent a recession. To curb inflation, they may need to increase interest rate. to prevent recession, they may need to reduce it.
* Either way can be bad because reduce interest rate will increase inflation and to increase will deepen the recession. It can take quite a long time for the economy to self stablise back to equilibrium.
What happened in the 1970s?
* The most well known stagflation situation happens during the oil crisis period in the 1970s.
* Developed nations like US and UK experienced high growth in the late 1960s and early 1970s.
* By mid-1970s, inflation soared to 12 percent as a result of quadrupling oil prices by the Organization of Petroleum Exporting Countries (OPEC), increases in the price of raw materials, and the lifting of Vietnam-era government-imposed Price and Wage Controls.
* This high inflation stemmed growth and the Federal Reserve Bank chose to tighten money supply to curb inflation.
* As a result, consumer spending and business borrowing slowed abruptly. The economy soon fell into a deep recession and doubled its unemployment rate to nearly 9 percent.
* The then US president Jimmy Carter tried to combat this stagflation with little success until the deregulation of various industries like airlines, railroad, trucking that help to bring living cost down and prices started to destablised in the 1980s.

What history repeat itself?
Maybe. The oil and commodity prices are still climbing which causes the current high inflation situation. The riots worldwide is a testimony of consumers difficulties. Economies are showing decreasing GDP growth. Investors are sitting on the fence, not willing to start a new business and freeze recruitment. All these are signs towards stagflation but no one admit it because there are inadequate financial data to prove it.


Anonymous said...

Global economy is stagnant. Aedes Mosquitoes breeding. Watch out.

Anonymous said...

We don't need data to prove what it is going to happen but is happening before our eyes.
I keep a stricter budget for the whole family. Those who believe they can spend wantonly on borrowed money will surely get into deep waters.
Don't pursue high-life living. Spend on bare necessities.
It is going to affect businesses and jobs are hard to come by.

Khiat Han Hwee Adrian said...

Thats what happening. You and me just can feel it, isn't it?

We are more careful with our spendings and investments. Just like people shelving their plans for new businesses, etc. Its a chain effect for stagnation.

But, are inflation coming down? NO... Oil price shot up to $142 y'day. The world is getting Crazy.

btw, just to share, I had just purchased SMRT share 2 weeks ago. People are really switching to Public Transport and everyday the train is packed like sardines... I took the MRT everyday. I know the diff.

Anonymous said...

So you think SMRT shares will go up? Do you know how many of those foreigners are not paying their fares? Singapore is a paradise for them to pull this kind of stunt. If you have been to China on a long term basis you will notice why they still have conductors on their buses. Also a walk into any shopping centre or supermarket you will immediately notice the difference in the level of security. Singapore supermarkets and buses are losing big time to these dishonest people and most of the time do not even know it. The locals are subsidising the foreigners and by buying the shares you are owning a company that is being exploited by them. The staff do not really mind after all it is not their money. Shareholders become the real loser.

Anonymous said...

Adrian, you made the right move, to buy into SMRT shares than some older people rushed into buying the investment product - Jubilee Series Notes at Standard Chartered.
I believe it is a good buy for the time being until another alternative energy commoditiy can replace oil infinitely: you are sure to profit.
I feel that airline shares would get badly hit should oil price goes up further. Public transport shares are better off.

Anonymous said...

It doesn't make sense to me to see many things happening around me. May I list them one by one.
1. Young or old like to spend on buffet meals than go to slimming centres to get back in shape.
2. Children doing extremely well still go to tuition centres or learning hubs for extra learning.
3. Many Junior Colleges' students find great difficulties in admission to local universities because Singapore has only three.
4. Singapore is ever-tearing down buildings to build higher, luxurious buildings at present high materials cost.
The list can go on and on but I sould not bog you down with all these.

Anonymous said...

Why buy SMRT? When oil shoots up SMRT's price will shoot down, right?
You need to get your analysis right.
You saw many people being forced to take public transport but you don't realise public transport is run on oil and that is cost to them if oil goes up. Or maybe you think SMRT runs on electricity but where is electricity from?

Khiat Han Hwee Adrian said...

Well. I'm not telliing people to buy SMRT shares. I just want to share that I had got some recently because I believe in it. It falls in well into part of my investment portfolio.

I din really do a lot of analysis, I only read through some analyst report and I just like SMRT because I commute in it everyday.

The trains are packed like sardines every morning and evening.
Try taking a train from Jurong East or from Eunos to city in the morning. You squeeze in, you won't fall down because there are no space for you to fall. Its not like that few years ago.

Anonymous said...

Everyone sees things in a very different perspective. The rationale behind why I think you have a good buy is that SMRT transport is here to stay. There is no other form of transport to replace the way we travel in Singapore. Majority of commuters will take buses or trains and their fares are much cheaper than taxis. When fares go up are unlikely to come down. It is unlike speculation but just don't put every thing in this basket.

Anonymous said...

We are living simply in an over populated country. And to think of it that its going to fill up to 6 Million people. Its rather crazy. We are only a small tiny island and a DOT on the world map. There really needs to be a serious thought of redesigning all the transport systems to cater for this growth. And by the way, instead of digging more holes around the island for MRT tracks. Maybe one can consider to but multi stories of expressways over one another. That has already been proven in Japan. The expressways are stacked high over one another.

The best thing to do is. Get a job within walking distance from home. Get a school for your kids within walking distance from home. Avoid going out too much. Cook at home.

Those days, people use to wonder if oil will surpass 100 dollars per barrel. Now the target is 200 dollars. Its becoming an even harder world to live in.

Sept 11 and the financial crisis in the past seems to have driven the world in the past into a slow down. At that point, flat and house prices tumble. I wonder when will this Oil bubble burst. I just hope that the bubble will not be too huge by the time it burst. Cause this time round, the impact will be worst.

Anonymous said...

As one of the reader mentions that it is important to spend prudently in times of stagflation esp on the bare necessities.

At this point, just my two cents worth. I see that emerging economy/developing countries can be in a better position for their people compare to the people of Lion City.

At least they still can keep some poultry and plant veg/fruits for their own consumption at a much lower cost. And this is the real truth of "bare necessities".

Anonymous said...

We only face stagflation when wages and prices keep increasing at a fast rate. Right now, only prices keep increasing but not wages. So, we only have high inflation. Hopefully, when oil prices is more stabilise, prices of other commodities will come down too.