As I usually do I read the economist online for interesting stories to read and some even to post on sci. But this article caught by attention, and it sounds eerily reminiscent of an era that was supposed to have died: Why do I raise the specter of Stagflation you may ask yourself? Well like in the 70’s oil prices are going up to very high levels and the economic sheds off huge amounts of growth as a result of each raise in the price of oil. What scares me more about 2004 compared to 1974 is that in 1974 OPEC cut its production, it has huge excess supply, today that is not true. Today OPEC is pumping out as much as it can really, and only Saudi Arabia can pump more. This is a much scarier situation because this isn’t a supply problem it’s a demand problem. Demand internationally is way too high, and production simply cannot match it. Stagflation is when prices go up, and growth does down because demand goes down as well. In the 70’s you had very high wages and very high costs for supplies so prices exploded. Now the US has lower wages but still very high commodity prices, thus the purchasing power of the American consumer is negated even further. 2/3 of the US economy is based on consumer spending. Also like in the 70’s the US is mired in a foreign war and is in a massive budget deficit which creates more demand, and increases inflation. Also the American dollar is getting much and much weaker which increases prices further like in the 70’s the US dollar is weak. To me at least unless demand calms down significantly over the next 5 years things will only get much worse.
Further reason why I fear stagflation within the next 2 years: http://sympatico.msn.cbc.ca/story/business/national/2004/08/13/Oil_040813.html People demand is not subsiding anywhere, it is exploding. The question we have to ask yourselves is: -Can we avoid inflation? -How fast can we transform our backwards economies into modern post-petroleum econmies? -Should stagflation happen what should the government do?
Some more info on the economics front with the US economy: Since the US is importing more goods then it exporting and her exports declined this is very bad news at least in the short term. If a low US dollar cannot stimulate demand for American goods nothing will. A low US dollar means higher prices for imported goods, but that doesn’t seem to phase the American demand for imported goods. Usually currency depreciation is a good thing…
More disturbing news from the world of commodities: This is a demand problem, and because there isn’t that much excess capacity left we should be seeing shortages in the future, also possible future oil induced wars. I’m I the only one scared shitless?
