How to Handle Stagflation

Excerpts from Dr. Enzio von Pfeil's July 25, 2008, appearance on CNBC Asia:

1. Dr. Enzio, while inflation was previously contained to food and energy, some economists say that is now spilling over to wages, triggering a wage-price spiral. They say broader inflation trends are now becoming more apparent. Do you share their view?
   • Yes: it is only understandable that “the little guy” will feel the terrible effects of this “tax” of higher food and energy prices: it reduces his disposable income, so naturally he will seek to get more money.
   • However, I doubt whether he will be able to do this. It all depends on how strong the unions in each country are.
2. What are some of emerging patterns that is cause for concern?
   • My guess is that you will not find a wage-price spiral evolving; instead, the “valve” will be rising social unrest. Indeed, we see this clearly in China.
3. The Asian Development Bank said many Asian central banks have been behind the curve in tightening monetary policy to deal with inflation. With inflation threatening to become more serious now, what options do central bankers have?
   • NO central bank can fight stagflation, i.e. cost push inflation. No central bank can:
     • Force it to rain more (agricultural commodities)
     • Force OPEC’s hand (oil)
     • Force miners to resume work (South Africa’s gold miners)
     • Tell China and India to stop growing/creating millions of jobs each year.
   • I for one find it disgraceful that highly paid economists at places like the ADB and IMF are asleep at the wheel and then, once the market has screamed loudly enough, they trot in with their usual precociousness, acting as if they have been saying this all along.
   • Indeed, even more disgraceful are some chief economists and chief strategists of major investment banks: even a blind person saw recession coming a year ago (we ”called” stagflation in Spring 2006). My cynical hunch is that the props desks of these investment banks told their chief PR guys (economists, strategists) to talk the market up so that they, the props boys, could unload the banks’ “long” positions: if the PR guys do not play ball, their bonuses would be cut, and their employment threatened.  Now that this largely has been done, no doubt the props boys have put on huge short positions. So now they will threaten the PR guys with bonus or indeed job cuts if they don’t talk markets down. I just wonder when huge institutional investors are going to sue such houses for having cost them and their retail investors trillions of investment dollars for their deliberate shenanigans with investors’ money.
     • Now that the props boys want the economists etc. to bray about recession or stagflation, that will keep the markets down longer than they should.
4. Some are calling for a united response among central banks to deal with inflation. How feasible is that?
   • For the aforesaid reasons: central banks cannot do anything about commodity inflation.
5. What else can they do to manage inflation?
   • They cannot manage inflation.
   • But they can manage social unrest by providing more fiscal “band aids”, e.g. tax cuts for the little guys.
6. Aside from tighter monetary policy, countries have to cope with slower economic growth by raising fiscal spending. What's your view?
   
   • We have stridently beaten the drum of “stagflation” to our clients since Spring 2006. We have had four stagflations since 1970.
   • So, in order to stem social unrest, expect more fiscal measures. Monetary ones cannot work.

Comments

[User 118015]

A comprehensive domestic energy policy in the USA would go a long way to provide a psychological boost to the domestic economy. A believable policy would immediately moderate inflationary expectations for commodity products....MarvinMBA

[iThinkBig]

You quell social unrest by increasing the quality of life. It's skilled job opportunities missing in the US. Agree with above on energy and also subsidize higher education funding. There is no short term solutions for all this pain, it's all mid-term and hence why I have stated economy will deflate by 20% (forecasted this June of 2007 before the oil shocks just recently crashed market again). President Bush proposed $300 B in Higher Ed in May, we see the recent cornering of the Democratic controlled House on drilling so he gets it but unfortunately for the citizenship, besides bailouts for the irresponsible in our financial sector, Congress will not do a thing until after elections as it wants there man (Obama) to get the credit. Shameful.

[jlounsbury59]

Great article and good comments. The energy crisis could be both problem and solution. Continuing the energy policy of the past (importing oil) creates a financial problem that dwarfs the current credit crisis, the national debt (on the books debt) and Social Security/Medicare unfunded liabilities combined. Changing our energy policy might create financial salvation. I try to discuss this on the latest post on my website.

[User 86999]

The title says: "How to Handle Stagflation", but I don't see where in this article this question is addressed. What did I miss?

[John Egan]

I agree somewhat with "iThinkBig".... You don't cure stagflation, but you dull the pain by providing opportunities. Just read in the paper that 1 out of 4 kids don't graduate from high-school.... That's pretty bad. Course, if they see their parents struggling against the odds, maybe they don't view education as a means to the good life. (Well, unless your one of G. Bushes chosen, in which case, hang tight... Those tax cuts are still on the table!)..

Also makes you wonder why someone like Bill Gates, who has made a considerable amount of money starting his business here in the US, is on the one hand whining about the lack of capable programmers and on the other busy handing out charity to other countries. Seems to me, that if he'd like to see a healthy US, he'd invest in education here. Of course, Microsoft has never been known for innovation, so why would anyone expect that?

jegan ;-)

[lonie]

Enzio, i think items 1,2,3 are right on . I was waiting to see someone put it in writing .

Good article .

[xander]

no amount of money can motivate the children of the underclass to act like whitey and try make something of their educational opportunities. nationwide 50 percent don't graduate and of the ones who do a large percentage are way below grade level in reading and math. why should they bother, preferential hiring programs are on their side.