Stagpanic

Forbes ^ | 2/4/08 | Daniel Fisher

[bruinbirdman]

The economy may be headed into the tank, but don't break out the leisure suits and Blue Nun just yet.

Hundred-dollar oil prices, creeping inflation in food and other commodities, gold behaving the way it did in 1979--could we be in for a repeat of stagflation?

The toxic combination of rapidly increasing prices and weak economic output made the 1970s a dreary decade. Predictably, pessimists are now coming forth with parallels between those years and 2008. Here's a contrary theory, one that says stagflation is no more likely than a revival of disco and bell-bottom pants.

MONEY SUPPLY: In the 1970s money-supply growth was out of control. After the collapse of the Bretton Woods system of fixed exchange rates in 1971 the Federal Reserve allowed the money supply to increase at 12% a year or more. That overstimulated the economy and encouraged labor and others to seek larger price increases that weren't constrained, as now, by foreign competition. The Consumer Price Index rose 11% in 1974 and the same in 1979--a long way from the CPI increase of 4.1% in 2007.

The 1970s Fed Chairman Arthur Burns "really couldn't bring himself to forcefully respond to the inflation forces that were in train," says economist Henry Kaufman. "The inflation rate today is much, much lower." If Kaufman isn't panicked, you shouldn't be. He, after all, earned the nickname Doctor Doom in the 1970s for his persistent warnings about inflation and growing federal budget deficits. . . . .

[RSmithOpt]

MONEY SUPPLY: In the 1970s money-supply growth was out of control. After the collapse of the Bretton Woods system of fixed exchange rates in 1971 the Federal Reserve allowed the money supply to increase at 12% a year or more. That overstimulated the economy and encouraged labor and others to seek larger price increases that weren't constrained, as now, by foreign competition. The Consumer Price Index rose 11% in 1974 and the same in 1979--a long way from the CPI increase of 4.1% in 2007.

If one uses the old formula the government used then, the CPI was 11% / year in the '70's and 9-10% for 2007.

[Malesherbes]

Exactly. We now have the witches’ brew of creeping inflation along with a phoney, deliberately understated CPI.After a while economists begin to believe their own lies.

[rbg81]

Agree, the CPI is phony. I think the real purpose is to make sure that tax revenues grow faster than entitlements. In short, it is a stealth tax on the American people.

[palmer]

Oil prices are back above $90 a barrel, but Kilian doesn't see a problem as long as strong demand in China and India is the cause. Only if prices are rising because of concerns about a sudden shortfall in supply, such as from fear of a Middle East war, should the Fed be concerned, says Kilian, who admits to the possibility of that

If there's an excuse, it's ok. Bizarre.

[DeaconBenjamin]

MONEY SUPPLY: In the 1970s money-supply growth was out of control. After the collapse of the Bretton Woods system of fixed exchange rates in 1971 the Federal Reserve allowed the money supply to increase at 12% a year or more.