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STAGFLATION IN U.S.INTRODUCTIONAn article from “The New York Times” published on Febuary 13th, 2011 mentioned that:“In the USA, CONGRESS has made a terrible mistake. Amid a rhetorical debate centered on words like “crisis,” “emergency” and “catastrophe,” it acted too fast. While arguments were made about the stimulus bill’s specific components — taxpayer money for condoms, new green cars and golf carts for federal bureaucrats, another round of rebate checks — its more dangerous consequences were overlooked. And now the package threatens a return to the kind of stagflation last seen in the 1970s.From a global perspective, the picture only looks worse. As we have debated how much money to borrow and spend in hopes of jump-starting our economy, we’ve ignored the worldwide stimulus binge. China, Europe and Japan are all spending hundreds of billions of dollars they don’t have in hopes of speeding up their economies, too. That means the very countries we have relied on to buy our bonds, notably China and Japan, are now putting their own bonds on the global credit markets.It seems that no one in Washington is discussing what happens when the world begins this gargantuan borrowing spree. How high will interest rates rise? And more fundamentally, who will have the money to buy our bonds? It is possible that the Federal Reserve will succumb to pressure to “monetize” our debt — that is, print new money to buy our bonds. In fact, the Fed is already suggesting that it will buy long-term Treasury securities in order to lower borrowing costs. If it does, then our money supply, which has already increased substantially over the past year, will grow even faster.To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of confidence. It calls into question the value of our money. And while we all share in the pain, the people whom inflation hits hardest are elderly people who live on fixed incomes, those in the middle class who are struggling to save for retirement and college and lower-income people who live paycheck to paycheck.Combine high inflation and high unemployment and you have stagflation. Hindsight shows how the pain of the late 1970s and early 1980s could have been avoided, yet we’re now again planning to borrow and spend — and raise taxes — as President Jimmy Carter did. Soon we may again find ourselves watching a rising “misery index” of inflation and unemployment together. If that happens, individual earning power will evaporate, and our standard of living will decline….”[Type text] Page 1 STAGFLATION IN U.S.Obviously, we are entering an era of high inflation, to judge by the massive growth of the money supply in the United States, Europe and Asia, and the stubbornness of central bankers who insist that high unemployment demands the creation of even more money. The last time the world went through a similar period was the 1970s. The term that defined the era was "stagflation."Thus because the 1970s stagflation did do great harm to the U.S. economy and global economy as a whole, followed by a period of recesssion and there are evidences that we are on our way to the replay of stagflation nowadays, a thorough understanding of stagflation is crucially important for individuals as well as policy-makers to make reasonable decisions.The urgency of this trend has led us to choose “Stagflation in the U.S.” as the topic of our assignment. In this study, we will give a clear definiton of stagflation. Besides, a deep analyse is made on the factual situation of the 1970s Great Stagflation and more recently, especially the main causes that leads to stagflation in the period. Lastly, we will come up with some recommendations for individual decisions and implementation of government’s policies.We hope that through the arguments and data in our paper, you could gain comprehensive understanding, including basic and in-depth knowledge, about the issue and be more confident, more active when making decisions in today economic situation. [Type text] Page 2 STAGFLATION IN U.S.CONTENTSI. DefinitionII. Facts1. Facts of stagflation in the 1970s2. Fears of stagflation returnIII. Causes1. General causes2. Causes of stagflation in the 1970s3. Explanation for risks of stagflation returnIV. Recommendations1. Increasing aggregate supply2. Long-term stock pick3. Commodity investment4. International system of buffer stocks[Type text] Page 3 STAGFLATION IN U.S.I. DEFINITION The generally agreed-upon stagflation definition is a state of the economy that exhibits elevated unemployment rates and inflation at the same time. Typically, stagflation presents serious problems for monetary policymakers, since the remedies for high unemployment are nearly directly opposed to the remedies available for inflationary cycles. Most economists believe stagflation can be attributed to either failed economic policies or to destructive or catastrophic events that seriously affect the production capability of the overall economy. During the 1970s, for instance, the United States experienced a prolonged period of stagflation due primarily to shortages of raw materials. Livestock feed manufacturing was significantly impacted by the loss of the Peruvian anchovy fishery in 1972, but the most significant economic factor was likely the oil crisis of 1973, when OPEC severely limited the international oil supply in order to control prices and boost profits for their members.Regardless of its origins, stagflation is likely to cause significant and prolonged economic problems that cannot be easily resolved. High unemployment reduces the overall buying power of consumers and companies, and increasing prices lessen that buying power even more. This can put a financial squeeze on both the consumer and the corporate sector and cause still more unemployment as companies try to compensate for lower profits, increasing expenses and the resulting reduction in financial liquidity.II. FACTS 1. STAGFLATION IN THE 1970s[Type text] Page 4 STAGFLATION IN U.S.People often refer to the 1970s stagflation as ‘the bad old days’. When they think of the U.S. economy in that time the following comes to mind first: o Recession o Inflation o Unemployment o High oil prices In the following parts, we will look more closely into some economic indicators, including Economic Growth Rate, Inflation Rate and Unemployment Rate, in order to identify Stagflation in this period of US history.a. Historical Economic GrowthThe 1970s were perhaps the worst decade of most industrialized countries', including the U.S.’s economic performance since the Great Depression. Although there was no severe economic depression as witnessed in the 1930s, economic growth rates were considerably lower than postwar decades between 1945 and 1973. U.S. manufacturing industries began to decline as a result, with the US running its last trade surplus (as of 2009) in 1975.In this paper, Economic growth is measured by Gross Domestic Product (GDP) in current dollars (i.e. Nominal GDP) and in year 2005 dollars (i.e. Real GDP). As can be seen from the table and graph, in the 1970s and 1980s, US economy experienced several periods of contraction: 1974 GDP contracted 0.55%, 1975: 0.21%, 1980: 0.28% and 1982: 1.94%. For the other years, real growth rate remained relatively small (less than 6%), with an exception of 1984 with a rate of 7.19%, indicating a period of slow growth and economic contraction.Annual Current-Dollar and "Real" Gross Domestic Product1960-2000YearGDPGDP in billions of current dollarsGDP in billions of chained 2005 dollarsReal Growth rate%YearGDPGDP in billions of current dollarsGDP in billions of chained 2005 dollarsReal Growth rate%1960 526.4 2,828.5 1975 1,637.7 4,875.4 -0.21%1961 544.8 2,894.4 2.33% 1976 1,824.6 5,136.9 5.36%1962 585.7 3,069.8 6.06% 1977 2,030.1 5,373.1 4.60%1963 617.8 3,204.0 4.37% 1978 2,293.8 5,672.8 5.58%1964 663.6 3,389.4 5.79% 1979 2,562.2 5,850.1 3.13%1965 719.1 3,607.0 6.42% 1980 2,788.1 5,834.0 -0.28%[Type text] Page 5 STAGFLATION IN U.S.1966 787.7 3,842.1 6.52% 1981 3,126.8 5,982.1 2.54%1967 832.4 3,939.2 2.53% 1982 3,253.2 5,865.9 -1.94%1968 909.8 4,129.9 4.84% 1983 3,534.6 6,130.9 4.52%1969 984.4 4,258.2 3.11% 1984 3,930.9 6,571.5 7.19%1970 1,038.3 4,266.3 0.19% 1985 4,217.5 6,843.4 4.14%1971 1,126.8 4,409.5 3.36% 1986 4,460.1 7,080.5 3.46%1972 1,237.9 4,643.8 5.31% 1987 4,736.4 7,307.0 3.20%1973 1,382.3 4,912.8 5.79% 1988 5,100.4 7,607.4 4.11%1974 1,499.5 4,885.7 -0.55% 1989 5,482.1 7,879.2 3.57%1990 5,800.5 8,027.1 1.88%Table 1: U.S. Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000)Source: http://www.bea.gov/national/xls/gdplev.xlsFigure 1: U.S. Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000)b. Historical Inflation RatesTable 2 shows Inflation Rate data for the USA during the time 1959-2000, including monthly and annual rates. Year over Year compares the growth rate of the Consumer Price Index (CPI-U) from one period to the same period a year earlier.[Type text] Page 6 STAGFLATION IN U.S.The oil shocks of 1973 and 1979 added to the existing ailments and conjured high inflation throughout much of the world for the rest of the decade. Before the year 1970, annual inflation rates mainly stayed below 3%. However, at the start of the new decade, the figure had more than doubled itself 10 years earlier, then slowing down at around 4% in the following 2 years. In 1974, there was a sharp rise in US inflation rate when it reached its highest of 11.04% in the last 15-year period. The buying power of money decreased remarkably and consumers were not willing to buy anymore. From 1975 to 1978, the rate went between relatively high levels of 7.6% and 9.1%, before reaching a double-digit figure again in 1979, breaking the 1974 record and soar to a new peak of 13.5% in 1980. In late 1980s, the situation became stable with the rate being kept under 5%.Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual1965 0.9709% 0.9709% 1.2945% 1.6181% 1.6181% 1.9355% 1.6077% 1.9355% 1.6077% 1.9293% 1.6026% 1.9231% 1.6129%1966 1.9231% 2.5641% 2.5559% 2.8662% 2.8662% 2.5316% 2.8481% 3.4810% 3.4810% 3.7855% 3.7855% 3.4591% 2.8571%1967 3.4591% 2.8125% 2.8037% 2.4768% 2.7864% 2.7778% 2.7692% 2.4465% 2.7523% 2.4316% 2.7356% 3.0395% 3.0864%1968 3.6474% 3.9514% 3.9394% 3.9275% 3.9157% 4.2042% 4.4910% 4.4776% 4.4643% 4.7478% 4.7337% 4.7198% 4.1916%1969 4.3988% 4.6784% 5.2478% 5.5233% 5.5072% 5.4755% 5.4441% 5.7143% 5.6980% 5.6657% 5.9322% 6.1972% 5.4598%1970 6.1798% 6.1453% 5.8172% 6.0606% 6.0440% 6.0109% 5.9783% 5.4054% 5.6604% 5.6300% 5.6000% 5.5703% 5.7221%1971 5.2910% 5.0000% 4.7120% 4.1558% 4.4041% 4.6392% 4.3590% 4.6154% 4.0816% 3.8071% 3.2828% 3.2663% 4.3814%1972 3.2663% 3.5088% 3.5000% 3.4913% 3.2258% 2.7094% 2.9484% 2.9412% 3.1863% 3.4230% 3.6675% 3.4063% 3.2099%1973 3.6496% 3.8741% 4.5894% 5.0602% 5.5288% 5.9952% 5.7279% 7.3810% 7.3634% 7.8014% 8.2547% 8.7059% 6.2201%1974 9.3897% 10.0233% 10.3926% 10.0917% 10.7062% 10.8597% 11.5124% 10.8647% 11.9469% 12.0614% 12.2004% 12.3377% 11.0360%1975 11.8026% 11.2288% 10.2510% 10.2083% 9.4650% 9.3878% 9.7166% 8.6000% 7.9051% 7.4364% 7.3786% 6.9364% 9.1278%1976 6.7179% 6.2857% 6.0721% 6.0491% 6.2030% 5.9701% 5.3506% 5.7090% 5.4945% 5.4645% 4.8825% 4.8649% 5.7621%1977 5.2158% 5.9140% 6.4401% 6.9519% 6.7257% 6.8662% 6.8301% 6.6202% 6.5972% 6.3903% 6.7241% 6.7010% 6.5026%1978 6.8376% 6.4298% 6.5546% 6.5000% 6.9652% 7.4135% 7.7049% 7.8431% 8.3062% 8.9286% 8.8853% 9.0177% 7.5908%1979 9.2800% 9.8569% 10.0946% 10.4851% 10.8527% 10.8896% 11.2633% 11.8182% 12.1805% 12.0715% 12.6113% 13.2939% 11.3497%1980 13.9092% 14.1823% 14.7564% 14.7309% 14.4056% 14.3845% 13.1327% 12.8726% 12.6005% 12.7660% 12.6482% 12.5163% 13.4986%1981 11.8252% 11.4068% 10.4869% 10.0000% 9.7800% 9.5526% 10.7618% 10.8043% 10.9524% 10.1415% 9.5906% 8.9224% 10.3155%1982 8.3908% 7.6223% 6.7797% 6.5095% 6.6815% 7.0640% 6.4410% 5.8505% 5.0429% 5.1392% 4.5891% 3.8298% 6.1606%1983 3.7116% 3.4884% 3.5979% 3.8988% 3.5491% 2.5773% 2.4615% 2.5589% 2.8601% 2.8513% 3.2653% 3.7910% 3.2124%1984 4.1922% 4.5965% 4.8008% 4.5639% 4.2339% 4.2211% 4.2042% 4.2914% 4.2701% 4.2574% 4.0514% 3.9487% 4.3173%[Type text] Page 7 STAGFLATION IN U.S.1985 3.5329% 3.5156% 3.7037% 3.6857% 3.7718% 3.7608% 3.5543% 3.3493% 3.1429% 3.2289% 3.5138% 3.7987% 3.5611%Table 2: U.S. Annual and Monthly Inflation Rates (1965-1985)Source: http://www.rateinflation.com/inflation-rate/usa-historical-inflation-rate.php?form=usairFigure 2: U.S. Annual Inflation Rate (1959-2000 Year-over-Year)c. Unemployment RateHere's a look at the U.S. unemployment rate for people aging 16 and over for selected years from 1960 to 2000. Throughout the 1970s and 1980s, unemployment rate was quite high in comparison with the percentage of 3.5% of 1969, which created a significant social burden for the economy. This might be the result of production contraction or reflected a level of minimum wage lower than expected. The rate fluctuated continuously during the period, creating ups and downs, however, was above [Type text] Page 8 STAGFLATION IN U.S.5% for most of the time. It kept hitting new records: 8.5% in 1975, 9.7% in 1982 and 9.6% in 1983.Unemployment Rate (%)1960-2000Year Rate Year Rate Year Rate1960 5.5 1972 5.6 1984 7.51961 6.7 1973 4.9 1985 7.21962 5.6 1974 5.6 1986 7.01963 5.6 1975 8.5 1987 6.21964 5.2 1976 7.7 1988 5.51965 4.5 1977 7.1 1989 5.31966 3.8 1978 6.1 1990 5.61967 3.8 1979 5.9 1991 6.91968 3.6 1980 7.2 1992 7.51969 3.5 1981 7.6 1993 6.91970 5.0 1982 9.7 1994 6.11971 6.0 1983 9.6 1995 5.6Table 3: U.S. Unemployment Rate (1960-1995)Source: http://data.bls.gov/pdq/SurveyOutputServlet[Type text] Page 9 STAGFLATION IN U.S.Figure 3: U.S. Unemployment Rate (1960-2000)As previously analyzed, we can see that the period of late 1970s and early 1980s is a typical example of stagflation of the economy, which is the combination of low growth rate, in other words the “stag”, together with high inflation and unemployment rate, or the “flation” in the term. By the time of 1980, when U.S. President Jimmy Carter was running for re-election against Ronald Reagan, the misery index (the sum of the unemployment rate and the inflation rate) had reached an all-time high of 21.98%. The economic problems of the 1970s would result in a sluggish cynicism replacing the optimistic attitudes of the 1950s and 1960s. Faith in government was at an all-time low in the aftermath of Vietnam and Watergate, as exemplified by the low voter turnout in the 1976 United States presidential election.2. FEAR OF STAGFLATION RETURNIn the 1970s, stagflation shocked traditional Keynesian economists, whose models said the economy could not suffer from both high unemployment and rapid inflation at the same time. Unfortunately, the Keynesians were wrong, because an economy obviously can experience both evils simultaneously. The typical view is that an economy in a deep recession is in no danger of price inflation. This belief is wrong both in theory and in practice. [Type text] Page 10 [...]... over the past year So the proximate cause of the rise in U.S prices is inflation in emerging markets, but its true origin is in Washington There is a second, purely domestic avenue by which near-zero interest rates in U.S interbank markets are constricting the economy Since July 2008, the stock of so-called base money in the U.S banking system has virtually tripled As part of its rescue mission in the. . .STAGFLATION IN U.S The worst bout of inflation during the postwar period occurred during the economic slump of the late 1970s and early 1980s More seriously, there is a fear of stagflation return According to the The Wall Street Journal from February 2008, The U.S is facing an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, ... corporate enterprises again have access to bond and equity financing, bank credit is the principal source of finance for working capital for small and medium-sized enterprises (SMEs) enabling them to purchase labor and other supplies In cyclical upswings, SMEs have traditionally been the main engines for increasing employment, but not in the very weak upswing of 2010-11, where employment gains have been meager... recovery from the recession In the long-run, the rapid economic growth of China and India along with the arrival of peak oil production, spell nothing but higher energy costs In other words, it is the return of stagflation Figure 6: Gasoline Price In 2011 Dollars Figure 7: Food-Price Index (1980 – 2010) Since both Gasoline price and Food price are indexed to inflation, it is necessary to compare the 1980... measuring core inflation with an explanation of the measures used in the graph below As can be seen from the graph, the misery index is simply the unemployment rate added to the inflation rate When either is high, there is some level of distress in major sectors of the economy Often, however, when (demand-pull) inflation is up, unemployment is down [Type text] Page 11 STAGFLATION IN U.S Figure 4: U.S Inflation,... remember the “misery index,” the sum of the unemployment and inflation rates The official unemployment rate in 2009 averaged 9.3 percent, for a total misery-index rating of 12.0 This is the highest misery rating in 26 years, going all the way back to 1983 when it was 13.4 Prices rose 2.7 percent during 2009, according to the Bureau of Labor Statistics’ recent update of the Consumer Price Index (CPI),... that matters is the size of the tax cut, not how it is accomplished Supply-side policy is more concern with the incentives built in the tax system that encourage working and invesment They are interested in the type of taxes levied as well as the tax rate Low marginal income tax rates allow people to keep more of what they earn, perhaps encouraging them to work more hours This would increase aggregate... undermined in advance his capacity to attack inflation through increasing unemployment and reducing personal incomes For his policies, if they did not reduce incomes as much as the increase in unemployment would have done in an earlier period, they did reduce production The number of unemployed shot up by more than one million in less than a year The rate of increase in the gross national product dropped sharply... interest rates be causing a credit constraint? After all, conventional thinking has it that the lower the interest rate the better credit can expand But this is only true when interest rates —particularly interbank interest rates—are comfortably above zero Banks with good retail lending opportunities typically lend by opening credit lines to nonbank customers But these credit lines are open-ended in. .. risk in smaller banks remains substantial as almost 50 have failed so far this year That the American system of bank intermediation is essentially broken is reflected in the sharp fall in interbank lending: Interbank loans outstanding in March 2011 were only a third of their level in May 2008, just before the crisis hit How to fix bank intermediation is a long story for another [Type text] Page 18 STAGFLATION . Page 1 STAGFLATION IN U.S.Obviously, we are entering an era of high inflation, to judge by the massive growth of the money supply in the United States, . and the resulting reduction in financial liquidity.II. FACTS 1. STAGFLATION IN THE 1970s[Type text] Page 4 STAGFLATION IN U.S.People often refer to the