Todays Krugman column: A Whiff of Stagflation

In the 1970’s soaring prices of oil and other commodities led to stagflation – a combination of high inflation and high unemployment, which left no good policy options. If the Fed cut interest rates to create jobs, it risked causing an inflationary spiral; if it raised interest rates to bring inflation down, it would further increase unemployment.
Can it happen again?
Last week fears of a return to stagflation sent stock prices to a five-month low. What few seem to have noticed, however, is that a mild form of stagflation – rising inflation in an economy still well short of full employment – has already arrived.
…
We shouldn’t overstate the case: we’re not back to the economic misery of the 1970’s. But the fact that we’re already experiencing mild stagflation means that there will be no good options if something else goes wrong.
.. [possible events: Consumer pullback, oil supply disruption, Asian central banks not buying dollar assets, housing bubble burst] ..
Any of these events could easily turn our mild case of stagflation into something much more serious.
How do we get out of this bind? As the old joke goes, I wouldn’t start from here. We should have spent the years of cheap oil encouraging conservation; we should have spent the years of modest growth in medical costs reforming our health care system. Oh, and we’d have a wider range of policy options if the budget weren’t so deeply in deficit.
So if any of these things does come to pass, we’ll just have to see how well an administration in which political operatives make all economic policy decisions, and the Treasury secretary is only a salesman, handles crises.

Posted by: b | Apr 18 2005 9:54 utc | 4

My new post on oil over at Kos
Thanks to fauxreal (I think) for the link to the CIBC study I exploited… (If it was someone else, don’t hesitate to claim your dues!)
Thanks to all for all the links you post here, it provides a wealth of choices for future topics, as demonstrated today by diogenes’ post being front paged.

Posted by: Jérôme | Apr 18 2005 11:49 utc | 6

IMF WORLD ECONOMY WARNING

Posted by: vbo | Apr 18 2005 12:40 utc | 8

Colman–
Don’t think you even need one of the holy trinity’s graphs (b,j,B) on that one; believe it’s right there in the recent (interest rate driven) recovery of the dollar/flattening of barrel prices…

Posted by: RossK | Apr 18 2005 14:03 utc | 10

As I try to understand economics, I return periodically to Wild Blue Yonder. That’s a keeper.
Hmmmm. Sure sounds like your report creatively confirms the laws a capital accumulation and the tendential fall in the rate of surplus-value.

Posted by: slothrop | Apr 18 2005 15:03 utc | 12

Stephen Roach’s piece today: Tilt!

An unbalanced global economy is at risk of becoming unhinged. Beset by record imbalances between current account deficits and surpluses, it doesn’t take much to derail a system that is already in serious disequilibrium. Such a possibility now seems less remote in the face of a confluence of powerful blows — an energy shock, threats to European unity, an outbreak of overt hostility between China and Japan, and the rising tide of US-led protectionist sentiment. Meanwhile, steeped in denial, global policymakers are asleep at the switch.
…
The stewards of globalization are nowhere in any of this. Another G-7 meeting has come and gone, and I ask myself, Why do they even bother? The 16 April communiqué was as vacuous as ever. As the world economy lists to the downside, the G-7 states, “…the global expansion has remained robust and the outlook continues to point to solid growth for 2005.” Their primary focus on energy is to, “…welcome efforts to improve oil market data.” And they barely paid lip-service to the “elephant in the room” — ever-widening global imbalances. The US succeeded in having any references stricken regarding its rapidly exploding current account deficit. The Wise Men appear to be smitten with Fed Governor Ben Bernanke’s recent whitewash of this problem, explaining away America’s external imbalance as an innocent outgrowth of a global saving glut (see Bernanke’s 14 April 2005 Homer Jones Lecture, “The Global Saving Glut and the U.S. Current Account Deficit”). A G-7 having its head in the sand says it all — the managers of globalization don’t have a clue as to how to cope with the real-time problems of globalization.
…
Little wonder world financial markets are reeling. An unbalanced global economy is not in great shape. The global growth engine — the United States — continues to derive its sustenance from asset markets and the unsustainably low real interest rates that support a wealth-driven impetus to aggregate demand. Not surprisingly, the Bernanke thesis conveniently celebrates the result without looking in the mirror and acknowledging the bubble-prone Fed’s culpability in creating this moral hazard. In the absence of another global consumer, I guess the rest of the world is willing to put up with a lot in order to keep the music going. Policy blunders are bad enough. History warns us that political risks are always the most destabilizing force of all. Those risks are now rising around the world. Beset by record imbalances and mounting political perils, a precarious global economy doesn’t have much to fall back on.

Posted by: b | Apr 18 2005 15:55 utc | 14

@Coleman # What effect does allowing the Chinese currency float have on oil prices and their ability to buy oil? It seems to my mind, that if the renminbi appreciates relative to the dollar, the Chinese get oil cheaper, and this will tend to push the price of oil up even more for the US. What countering effect am I missing here?
# Does anyone have a link to a comparison in oil price in euros vs oil prices in dollars? How much has the price of oil risen rather than the value of the dollar dropped?
1. You might be very right on that one. A higher renimbi would mean cheaper oil for China, but also less exports. It is difficult to say to which side (up or down) of total consumption this will trend. I assume higher consumtion even when exports fall as internal prvate consumption is trending up.
2. Graph: Dollar and Euro Prices for Crude Oil
Until the Europeans killed off the three year long Euro appreciation versus the Dollar by throwing away the stability pact, Oil in Euros was trending much less higher then in Dollars.

Posted by: b | Apr 18 2005 16:17 utc | 16

Sweet T’undering Hey Zeuss.
Think I just got an education….

Posted by: RossK | Apr 18 2005 16:47 utc | 18

PS Roach calculated a few weeks back that a “neutral” Fed rate wqould be at around 5.75%…

I know people here investing in the US on the basis of a worst case of 4% in two years. Just a little bit optimistic I suspect, but they’re working on the theory that they can convert the loan to euros if it gets really bad over there.

Posted by: Colman | Apr 18 2005 16:51 utc | 20

Why the usual condemnation of “marxists”? I’m w/ RossK: I’m learning. But, when I read Roach/Krugman/prudentbear/billmon, the analysis of the economy, sure sounds to me like anything teeple or sweezy or other marxists might provide. The investigations include the usual positivist methodology with all those data provided meticulously by university and government researchers. The defamation of “marxists” seems to revolve around the view marxists don’t parse enough and therefore oversimplify. I suppose it would be nice to see proof of this–and not too selectively, please.
I guess it’s the necessary, reflexive condemnation of marxists as uncreative dumbfucks which bugs me. My own evolving experience with the macro-econ literature suggests this arrogance is unjustified and is rehearsed so often by progressives in order to reassure the status quo everyone is playing by the same rules.
I guess.

Posted by: slothrop | Apr 18 2005 17:12 utc | 22

This stuff make my frontal lobes curl, but does it seem that Jerome, above, is more or less in agreement with Stirling Newberry about the vicious cycle of American debt and energy shortfall?
Jerome: Easy debt boosts consumption, which boosts growth and imports, which boosts trade deficits; which boosts seigneuriage (as foreigners are keen to invest in the booming us economy or forced to recycle their excess dollars); which encourages excess spending by the government (knowing that it won’t have to pay the price for its carelessness); which requires increasing debt, etc…
Stirling:

The investment deficit and budget deficit together create conditions in which real wages do not increase as quickly and there is less growth in the kind of upwardly mobile employment that people need. This situation also creates incentives for government to tax consumption, both because this reduces the trade deficit, and because the wealthy cannot be taxed. This creates a wages deficit. The wages deficit, in turn, gives people an incentive to borrow more, particularly against their homes. This creates a wealth deficit, with increasing inequality in assets. The solution to the wealth deficit is for people to use gasoline to shop around for better bargains, and to buy homes further from where they work, and in areas that do not have to pay the carrying costs of large metropolitan areas. This means they burn more energy, and this loops back around to the beginning of the cycle. The whole cycle then is:
1. Energy deficit creates trade deficit.
2. Trade deficit creates investment deficit.
3. Investment deficit creates budget deficit.
4. Investment deficit and budget deficit creates wages and wealth deficit.
5. Wages and wealth deficits create pressure to use energy to generate housing wealth, which starts the cycle over again.
Each stage pushes the next along, because at each stage there is a group of people that can benefit by pushing the problem to the next group of people.

I think Stirling is partisan, i.e. he was attached to the Clinton political machine and is nostalgic for the Clinton/Rubin solution which was never given a fair shake (per Stirling, anyway). But to this semi-literate struggler with macro-econ, some of what he says seems to make sense.
I agree s/slothrop that tarring all Marxists with the “uncreative sectarian fossils” brush is unjust. The real sectarian fossils today are the die-hard adherents of the Chicago School imho, who can never get past the fundamental Article of Faith: that infinite growth is possible on a finite ball of rock.

Posted by: DeAnander | Apr 18 2005 17:48 utc | 24

DeAnander – I actually wrote my bit as a reply to one of Stirling Newberry’s posts, and copied it back here with small modifications, thus some similarities… We tend to hog his Kos threads with our discussions on the economy of Europe, with me playing the starry-eyed optimist, seeing “Anglo-Saxon” plots everywhere…
“Anglo-Saxon” is the mirror of “Marxist”, I suppose…

Posted by: Jérôme | Apr 18 2005 19:00 utc | 26

My question to the economically literate (and it isn’t a rhetorical one): Is there anybody among you who thinks that a soft landing for the US economy is a probable outcome of the situation?

Posted by: teuton | Apr 18 2005 19:35 utc | 28

Coming crisis: You don’t sound that optimistic, J, with “global recession at best”, though Billmon has the same fears. I’m no economist and am quite ignorant of this overall, but from what I see it’s also my opinion. In theory, this can be fixed. That is, if we could control everyone and every human had complete knowledge and rational thinking. Since it’s not, I don’t think it can be avoided.
And Europe will be nastily hit as well, I don’t doubt it. Though less than the US, and this may be what matters when the dust has settled (of course, EU won’t be the only player that will suffer less than the US); I just wonder if this will go down to a last-man-standing trade war or if the system will collapse so strongly and fast that people won’t even bother. What I also wonder is what will happen to the economic systems and theories if the US really goes down. We know what happened to the Communist bloc when the head was cut off, and I’ve always wondered if the same with the US would do in the now overarching laissez-faire capitalism.
Of course, I’m also trying to figure what the French Non to EU Constitution will mean in the medium and long run, even if it’s an event of secondary importance in what is going on.
US has a 8% deficit? Well, considering that France and Germany are blamed for getting slightly over 3%, I’d say the US are doing even worse than any post-communist Eastern Europe country. Though maybe better than late 1990s Argentina.
Debts: Jeremy Rifkin was scared shitless about this 10 years ago when writing End of Work, seeing that people were actually going into debt to buy stocks, which would leave millions without resources when the market would readjust. I’ve been thinking about this often, and the US has been very lucky that the bubble went so high, because it’s the only reason that prevented a complete collapse so far, imho.
slothrop: Well, whatever, Marxism still is right that the capitalist system has deadly inherent contradictions that will ultimately bring its downfall. Except it took longer than expected. Basically, it is a spiralling behaviour, each crisis being bigger and going lower than the previous one. Usually, between crisis, the situations rises higher than in the previous cycle as well (particularly obvious in the 90s). And this time went so high that the crisis took a long time to come compared to previous ones.
The following isn’t classical Marxist theory, but something Diamond or anyone knowledgeable about the 2nd law of Thermodynamics should know. The final crash of the capitalist system can only come when it is the ruling system that basically owns the bulk of the planet and its resources. Then the law can come with full force, because capitalism would then be a nearly completely closed system – which it wasn’t as long as there were countries to colonise and an Evil Empire to bleed. (of course, one could suspect that most economic-social-political systems would face this crisis had they become a worldwide system)

Posted by: CluelessJoe | Apr 18 2005 19:49 utc | 30

Want to rethink primitive accumulation and how current it is? Try Silvia Federici’s Caliban and the Witch: Women, the Body and Primitive Accumulation.

Posted by: citizen | Apr 18 2005 20:08 utc | 32

thanx citizen

Posted by: slothrop | Apr 18 2005 20:15 utc | 34

@teuton Is there anybody among you who thinks that a soft landing for the US economy is a probable outcome of the situation?
Anything less than 1929 is a soft landing in my view and is most probably achievable if some people would act. That doesn´t look likely right now.
Than again the economic theory framework is a complex dynamic system and these are hard to predict especially in the time dimension. And todays complex dynamic system can change. Outside events may change the fabric of the system itself which leads to a new system with new degrees of freedom.
That´s the fun with macro economics. You always get new challenges.

Posted by: b | Apr 18 2005 20:21 utc | 36

The following isn’t classical Marxist theory, but something Diamond or anyone knowledgeable about the 2nd law of Thermodynamics should know. The final crash of the capitalist system can only come when it is the ruling system that basically owns the bulk of the planet and its resources. Then the law can come with full force, because capitalism would then be a nearly completely closed system…
I think this is already happening — global capitalism coming up against the realities of a closed system — and some of what we are seeing now in the US is imho “internal colonisation” — as the opportunities for external colonisation are exhausted or become too costly (one way or another, diminishing returns). I suspect this is happening in at least three senses in the US:
Literal/Geographical: Some areas and demographics of the US exist more or less as colonies of the coastal concentrations of capital — poverty, toxicity, etc, are “dumped” onto designated spots (the TVA region, Cancer Alley in Louisiana, cored-out ex-industrial towns, Walmart-bombed rural counties) much as the ever-adorable Larry Summers advised dumping toxic waste on brown people in poor countries. Unsurprisingly, brown people are also often located in these dumping grounds w/in the US. This internal-colony dynamic has been there all along (after all, the entire US is a colonial nation), but with the gutting of human services including schools, plus the rocketing cost of health care, plus disappearance of physical industry, no compensatory benefit or redress or “way out” is being offered to the residents of the “sacrifice zones.”
Criminalisation/Control: The gulag of brutal US prisons [never forget we imprison more people per thousand residents than the Chinese, by a large factor. iirc only the Russians imprison as high a percentage if the population as the Yanks] creates another internal colony, also serving as a minatory example for those who might rebel against their colonised status on the outside. I think 2 mio Americans are in prison and another 5 mio on parole or otherwise under direct control of the authorities. The racial bias of the US CJS is so notorious that I think we need not go into that at tedious length… the persons living under these stringent controls amount to a Bantustan in their own right — or several. To be sure, some are violent offenders and we might be glad that someone is keeping an eye on them. But in many cases their “crime” was the possession or sale of recreational drugs which elsewhere in the world are considered legal or a mere misdemeanor. In many states they have lost their right to vote as a result of arrest or imprisonment — another attribute of the colonised is that they don’t get to vote in the affairs of their colonisers.
Class/Race/Debt: The ruling class has turned on its own society now, to loot and exploit. In addition to the traditional crashing and looting of third world nations, the plutes are now crashing and looting the economies of “their own people” — a perfectly meaningless trope insofar as capital is now global, infinitely mobile, infinitely liquid, and can be moved out of the way deftly at the right moments. The ruling class is now, imho, as international as the ruling class of Europe during the heyday of monarchical nation-states — with a Hapsburg of some flavour on every throne in sight, every monarch the cousin or in-law of every other, etc. The loyalty of the “Davos class” is to their money and to each other (in that order, I suspect) and not to anything so tediously local as a nation-state. Flags, like taxes and the obligation to repay a debt, are for “little people”. Hence there is no emotional or moral obstacle to “looting one’s own nest”. I am guessing that, in the wake of the anti-bankruptcy legislation, we will see imprisonment of defaulting debtors (i.e. “debtors’ prison”) and possibly forced labour. There have been one or two cases already of arrest and detainment for unpaid and unpayable medical bills — outlying points, but possibly indicative.
The indebted in the US may well become another internal colony, treated by their own gov’t and usury-industry exactly as WB/IMF treats third world countries suckered or forced into debt. I note in passing that w/in a generation this could become an enormous selling point for Islam with its strictures against usury!
As to the Second Law — here’s the irrepressible and alarmingly productive Stan Goff: Capitalism is Against the Law (Part I) and Paet II quoting what I consider a rather astute and not excessively abstract bit of Red analysis:
“Imperialism is the political expression of the accumulation of capital in its competitive struggle for what remains still open of the non-capitalist environment”
-Rosa Luxemburg, “The Accumulation of Capital,” 1913
In other words, to my ear pretty much what was said above: capitalism struggles towards the state of Total Commerce, Total Enclosure: the penetration of commerce and monetism into every crevice of society until there is no transaction between human beings that is not a market transaction, no good or service that is not sold for money, no commons, no human rights (only “earned” and “paid for” privileges), no “unproductive mouths”, no communication that is not advertising, no intellect that is not property. The dream of the plutocrat is that one day, you will have to pay fori the air you breathe — and the dream of his buddy the totalitarian is that you will be wearing a whole-body wireless monitoring system so that we know how many breaths to bill you for.
At which point — or, please God, well before it — the system will crash because there is no uncolonised space left from which to loot resources (source) or into which to dump “externalised” costs (sink). On a purely personal note, the totally capitalised world comes pretty close to my idiosyncratic vision of Hell. Frankly, the suppositional peak oil crash might be preferable.
Sorry this isn’t as coherent as I would like — scribbling in haste. Lunch break over…

Posted by: DeAnander | Apr 18 2005 20:51 utc | 38

fascism & war will soften “the landing”

Posted by: slothrop | Apr 18 2005 21:14 utc | 40

DeA,
the Davos class
Now that is a useful term. Thank you.

Posted by: citizen | Apr 18 2005 21:26 utc | 42

@slothrop in other words the Yanks will soften their landing by landing on someone…?
If goods do not cross boarders, armys will.
Don´t know where I picked that up, but it is reasonable to me. With protectionism rising all around the grand cycle turns to invasions again.
DeA – I would like to post your thoughts 4:51 when you think they are coherent enough. You are on to something…

Posted by: b | Apr 18 2005 21:38 utc | 44

fascism & war will soften “the landing”
Kunstler’s not too worried about Fascism:

Many of my friends and colleagues live in fear of the federal government turning into Big Brother tyranny. I’m skeptical. Once the permanent global energy crisis really gets underway, the federal government will be lucky if it can answer the phones. Same thing for Microsoft or even the Hannaford supermarket chain.

In the shorter term, I think the Bush Administration is in for a very rude awakening if it attempts to impose martial law (say, following another terrorist attack). Seems to me that, rather than shooting up fellow crackers, the cops will turn their guns back at the Administration itself — not only because they won’t want to shoot at their racial brethren, but also because it’ll be fairly obvious at that point that the “Global War On Terrorism” isn’t preventing terrorism, but propagating it. (Unless, I suppose, the Administration will be able to convince enough people that 9/11 II had been perpetrated by domestic leftists…)
As far as war goes, the U.S. will no doubt continue to blow things up. But as the occupation in Iraq ably demonstrates, that won’t enable it to control the world’s oil supplies — and thus won’t help to soften the landing.

Posted by: Eddie | Apr 18 2005 21:54 utc | 46

The Totalised Capitalist World in Images
a recent image-hacking contest online — how far will advertisers go? slow to load, many images, imho well worth the wait.
@b thanks, but give me a day or so…

Posted by: DeAnander | Apr 19 2005 0:54 utc | 48

Don’t know what has the stock market spooked but doubt that they are smart enough even to understand what Billmon has laid out much less worry about it. I’m not any smarter than them but do know even that when economies/industry move into uncharted territory and begin proclaiming that the old rules are no longer operative and everything is not just okay but positively robust that it’s time to think about it again. Dow 36,000 (without massive inflation) and The New Economy that posited companies didn’t need to make anything and could do it with debt instead of capital while stock prices were trading at historically irrational levels didn’t seem credible to me.
Now “deficits don’t matter,” we can have “guns and butter” without inflation and the free market fairy is the solution to all economic problems also don’t seem credible or sustainable. What I don’t know is if the US consumer is merely eating the surplus “potatos” the world is producing or if we’re chowing down on the “seed potatoes” of the world. All I know is that we are consuming and not investing with all that capital the world is loaning us, and not sure how that can be a good thing in the long run.

Posted by: Marie | Apr 19 2005 1:57 utc | 50

fascinating discussion, all. thanks.
Knut– what are “the pulses” that are cheap and nutritious? is this another way of saying eat the rich? 🙂
Kunstler’s idea of a post-industrial era seems to think of a collapse as a quick thing. From the examples of other such moments, though, isn’t a more likely scenario a varying generational decline?
Those alive today will have one experience…a painful economic adjustment, in addition to a painful reality adjustment. By the time of their grandkids, the world will function differently. For that generation, population decreases will occur for reasons that are not problems today…diseases that we now deal with in industrial nations, (or new ones that have been unleashed between now and then)….starvation, migration out of unsustainable places as unpredicatable climate and weather patterns create food problems.
Between this generation and that one, continued wars for energy, as the Pentagon predicts, but these exacerbate rather than deal with the problems because different solutions are not sought when adjustments would be easier to produce…which is the defining moment of this generation.
But I’m obviously not an expert and am just repeating scenarios I’ve read about elsewhere. Before Diamond’s Collapse, there was another book, The Green History of the World. Has anyone else here read that one?

Posted by: fauxreal | Apr 19 2005 2:39 utc | 52

Clueless:
The final crash of the capitalist system can only come when it is the ruling system that basically owns the bulk of the planet and its resources.
Or when it can not expand any more for some other reason (like poor people refusing to hand over their water supply to the system and succeding). That is the crash can come when capitalism rules the whole world or when it is stopped from expanding. Anyway the crash will come.
Fauxreal:
Knut– what are “the pulses” that are cheap and nutritious? is this another way of saying eat the rich? 🙂
I thought about that one for a while and settled on the pulses from the headlights…
DeA:
On union organisation, there was a struggle between General Motors plant in Sweden (formerly Saab) and one in Germany which looks like a prequel to a more global capitalism. Both places were told one would be shut down and the strong swedish and german unions started underbiding each other, while the governments started overbiding each other with new accessroads and what have you not. Winner: GM.
These factories used to be different companies and are situated in different countries thus making union cooperation hard. When hedgefunds rule all autocompanies it will be so much harder, and even now two strong well-organised unions in two close, germanic-speaking, social democratic ruled, both within the EU, countries fail miserably.

Posted by: A swedish kind of death | Apr 19 2005 12:24 utc | 54

It might be that the current market tremors are a result, in part, of the possibly misguided cracking down on credit card debt just passed by Congress. Could it be that consumers are a tad shaken by the idea that their card debt is more inescapable than they thought? Or perhaps more likely, is it possible that the big players can at least look that deeply into the implications of that bankrupty bill? If consumer spending (and debt) is the main engine, that bill might have been shortsighted. Which of course is the completely s.o.p. of the current Administration. They’re just ass-kissing the banks after all.

Posted by: Beel | Apr 19 2005 12:31 utc | 56

What will thw wealthy elite do when we can no longer support them?

Posted by: pb | Apr 21 2005 1:08 utc | 58