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If It's Not Stagflation Now, It Never Was



June 17, 2011 – Comments (12)

Did we have stagflation in the 1970s?  Does everyone agree on that?  Then we have stagflation now.  Because if you calculate the CPI today in the same methodology it was calculated in the 1970s, it is running at 11.2%.  Combine that with slow growth and high unemployment, shake it up and stir, and what do you have?   The same exact combination from the 1970s.

Stagflation wins, folks.  Or there was no stagflation in the 1970s.  Take your pick.

No matter how you measure the unmeasurable and subjective phenomenon called price inflation - which is always a long run result of excess money creation - it continues to trend upward.

Who Predicted Stagflation?

June 15, 2009

Why I predict serious stagflation by Robert Murphy, Austrian School of Economics

"When doing interviews for my new book on the Great Depression, a natural question comes up: will the present crisis turn out as bad as the 1930s?

My standard answer is typical for an economist: "yes and no." On the one hand, there were very specific reasons that unemployment broke 25 percent in 1933, and we don't have those factors in place today. So I don't think the official unemployment rate will get anywhere near that catastrophic level, though it could very well come in at the #2 spot in US economic history.

However, even though unemployment rates will not be as severe, I still predict that we are in store for a miserable decade of economic stagnation. Given all of the huge assaults of the federal government into the private sector in just the past six months, I frankly don't understand how anyone except true believers in Karl Marx can be seeing "green shoots."


I wonder if the Austrian School economists ever get tired of being right?

David in Qatar

12 Comments – Post Your Own

#1) On June 17, 2011 at 3:15 PM, Melaschasm (69.35) wrote:

I spent most of 2010 wondering if we were going to have stagflation or a double dip.

It looks like Ben Bernanke's promise to print as much money as it takes to generate nominal GDP growth is being kept.  

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#2) On June 17, 2011 at 3:28 PM, Jbay76 (< 20) wrote:


Great link...thanks

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#3) On June 17, 2011 at 3:40 PM, catoismymotor (< 20) wrote:

You've set you hook with some enticing bait that is sure to lure the Keynesians.

I frankly don't understand how anyone except true believers in Karl Marx can be seeing "green shoots."

With traditional agriculture a field is left to rest for a specific period of time in order to allow it to recover before it is next used for planting. I like to think that the next five to eight years we will be in such a resting period before we see viable green shoots. In the mean time set up you portfolio to take advantage. Investing is like chess: You must think a few moves ahead if you want a favorable outcome.


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#4) On June 17, 2011 at 4:24 PM, chk999 (99.96) wrote:

I remember the 70's quite vividly. We haven't hit the high inflation part of stagflation yet. (But give it time.) When wages start getting some upward pressure that exerts upward pressure on commodities which exerts upward pressure on wages, then we'll see it start to roar. 

The high inflation period does give you two good opportunities. Stock prices get cheap due to multiple compression. Plus, bonds get cheap as their prices fall to match the yield to maturity of current interest rates. Buying bonds as the interest rates are very high and starting to fall can be very profitable. 

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#5) On June 17, 2011 at 4:59 PM, buffalonate (45.13) wrote:

The only the reason the economy has slowed back down is gas prices have gone through the roof.  The economist James Hamilton has shown that high gas prices inevitably slow down the economy and ruin consumer sentiment.  Oil prices are crashing now so gas prices will soon follow and bring life back to the economy.

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#6) On June 17, 2011 at 7:43 PM, ChrisGraley (28.49) wrote:

George Soros April 7th 2009 

 Sir Richard Branson Oct 10th 2008

Ron Paul Feb 28 2008

Some people saw it coming.

Few people listened. 


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#7) On June 17, 2011 at 8:52 PM, FutureMonkey (91.59) wrote:

I agree with Robert Murphy's statement that we are in for a miserable decade of economic stagnation.  Afterall, we didn't let market forces create the bottom.  We acted agressively to rescue, soften, and delay, so we didn't hit bottom so hard and so fast.  The result is a softer, gentler pain over 10 years instead of taking our medicine all at once followed by climbing back out from the bottom.  So now we stay flat, treadwater until the bottom climbs up to us. 

 I will disagree on his inflation prediction, at least as of 2 years after he wrote this article.  As long as you can buy a 50 piece chicken McNugget box at McDonalds for $10, I'm not worried about inflation.  It isn't here (yet).  The massive influx of money supply over the last 2 years prevented deflation.  We still have ongoing deflation of housing, flat pricing on most consumer goods, modest inflation on food prices (that has compressed margins for the providers but hasn't hit consumers hard).   Food is still less than 8% of median household budgets (compared with 15-20% in the 1970's). Gasoline is the only major household expenditure going up to a pain point, and gasoline fluctuates wildly due to multiple factors in addition to the money supply.

Even modest inflation is likely to be more hidden (shrinking package sizes but same price, lower quality products but same price).  Companies will absorb much of the shock in margins rather than risk losing market share to lower priced competition, even if it means less profit.  Maybe each chicken nugget will get smaller, but I doubt the price will go over $10 for that massive calorie bomb.

 I haven't raised prices for my services since 2006 and have taken a pay cut for a lot of my consulting and public speaking work.  Most other service providers haven't raised prices much, but  are working twice as hard to tread water or in exchange for modest growth.  Travel (hotel rooms, airlines, etc) are still a pretty flat.  The exotic dip in 2008 was due to falling demand and relative to 2008-09, inflation look reals.  Inflation relative to the longer trends is quite tame.

When inflation does hit, it will probably hit hard and fast and most of us will not be positioned to profit (except for David who will probably beat us all).  As David said the catalyst will be wage growth.  As long as we have 10% unemployment, flat to downward wages, and weak demand, I'm not too worried about inflation.  In Murphy's article he pointed out that during the Great Depression FDR kept wages artificially high, that isn't happening today, at least not in the private sector, so I don't think we will experience the same devestating effect Murphy warned about.  I'd like to see less tinkering and let the market float withing a range without interference for a while.  Intervene if we start seeing hyperdeflation or hyperinflation, but let market forces work without so much constant bickering, manuevering, and excess emphasis on short term concerns.

Thanks David.  Great post and great link.  Always keep me thinking.


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#8) On June 17, 2011 at 10:02 PM, Frankydontfailme (29.37) wrote:

I like your response Future Monkey but I fear you're underestimating the effect of the worlds increased money supply. Inflation will come with or without wage increases.

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#9) On June 17, 2011 at 10:58 PM, outoffocus (22.87) wrote:

Who Predicted Stagflation?

I predicted stagflation.  Just do a Fool search on "outoffocus" and "stagflation" and see how many hits you get. lol

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#10) On June 17, 2011 at 11:00 PM, outoffocus (22.87) wrote:

#3) On October 16, 2008 at 9:35 PM, outoffocus (25.83) wrote:

I think the fed wants massive inflation by any means necessary. What to they care? They will be rich regardless. It doesnt matter that salaries arent rising to meet this inflation. As long as the fed continues to print money, we are going to have stagflation. You cant squeeze blood from a rock.  But the Fed is sure going to try.

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#11) On June 18, 2011 at 2:10 PM, addikt06 (< 20) wrote:

I have to say George Soros is a genius

Every time the man speaks it makes so much sense to me 

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#12) On June 18, 2011 at 3:53 PM, dwot (28.88) wrote:

I remember in the late 70s or early 80s my father going on about how much people's lives had improved because of the events of the 70s, yet, to use his words, they were too "stupid" to see it. 

He said that wage increases had exceeded the the cost of living all through the 70s so people had more disposible income and also, that people had a lot more money for paying down debt.

I worked in banking starting in 79 so I got a pretty good picture of how people were managing their financial resources as back then people used cheques and every cheque people wrote a teller (me) checked back to their statement before it was mailed.  So, I saw a wide range of people's incomes and spending habits.  

When I worked in banking I saw many 30-something year olds paying off their homes.  Today it takes many people into their 30s just to get a down payment.  Those born in the late 40s had borrowed 10-15 years earlier and their incomes had gone up in the range of double and the debt burden was dramatically reduced.

Being so young in 1979, I thought that was the way it was always going to work, you get a home and over time your home costs go down relative to income.  But in my case we actually had less household income the last 2 years we owned our home then what we'd had in 1993 when we bought, and income was utterly flat until it went down in 2005.  We sold January of 2008.  I think every household cost except the mortgage at least doubled over that time.  

This is the economic reality that I think young people are facing today and I would so caution against home ownership unless you have a 10-15 year purchase plan.  I don't think relying on wage increases to cover increasing costs or to make the budget easier is a wise plan.  The budget needs to be comfortable at the time of purchase or it isn't a wise thing to do.

There will be big expenses that come up, replacing a vehicle, an expensive home maintenance job, and you just can't rely on increasing income to make that manageable.

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