Thursday, June 26, 2008
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.
at 11:34 PM