is stagflation the future of the US stagflation or something worse

Discussion in 'Economics' started by zdreg, Feb 1, 2011.

is stagflation the worst outcome in the next 3 years

  1. moderate inflation

    2 vote(s)
  2. moderate deflation

    2 vote(s)
  3. hyperinflation

    2 vote(s)
  4. stagflation

    6 vote(s)
  1. zdreg


    Charlie Gasparino

    Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His latest book, Bought and Paid For, is about the Obama administration and Wall Street.
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    Charlie Gasparino

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    Will the chaos in Egypt reverberate here financially? Charlie Gasparino on how some economists fear a return of 1970s-style "stagflation," and how Chinese policy helps stoke it.

    All the signs have been pointing to a robust economy in 2011, from the president's pump-priming cave on Bush-era tax cuts (as well as accompanying extension benefits) to business openness to turning cash stockpiles into expansion. The stock market has cracked the 12000 level, and Republicans have been privately worrying that, in prodding Obama into adopting more free-market principles, they inadvertently saved his presidency.

    -- Empty Space Deleted by Admin Joe --

    Now comes the political crisis in Egypt and you can almost feel the markets fret. Oil prices have been edging up, the markets recorded their largest decline since November, and even worse, the chatter among many economists has raised the specter of global "stagflation," the economic disorder that made the late 1970s and early 1980s among the worst years for the economy since the Great Depression.

    Of course, there are many reasons to be worried about Egypt's instability aside from its economic impact. Egypt is possibly our most important Arab ally, and a friend�or at least not an enemy�one of America's bedrock partners, its next-door neighbor Israel. In recent years, Egypt has seen a rise in Islamic fundamentalism, and the crisis that has stunned Mubarak, a despot with pro-U.S. leanings, has eerie parallels with the late 1970s, and the shah of Iran. You know how that turned out.

    But the economic impact of Egypt's political unrest shouldn't be underestimated�and certainly not ignored by investors and economic policymakers. The markets, of course, are always looking for reasons to trade up or trade down, and after cranking out gains over the past eight weeks, looting and rioting in the Middle East was as good as a reason as any for traders to take some profits.

    Still, what happened Friday wasn't a mere hiccup for a market poised for Dow 12000 and above; rather it's the realization that a government potentially hostile to the U.S. and its interests could control the Suez Canal, a vital shipping lane for oil coming from the Middle East and to the West; it is a recalculation of the risk of severe economic turmoil if Egypt is swept into a radical Islamic frenzy and if oil prices double or even triple as a result; it's the recognition that for all the positive forces influencing the economy now, there's also a strong undercurrent of weakness, a structural imbalance that makes stagflation�where a economy suffers from both high unemployment and inflation ................
  2. 1) 0-1-1-1. :confused:
    2) You didn't include hyperdeflation as a choice. :eek:
    3) Horrible fundamentals and bullish sentiment is a scary backdrop. :(
  3. zdreg


    1st comes the stagflation.

    Stagflationary risks from the Arab street

    By Nouriel Roubini

    Published: February 1 2011 14:47 | Last updated: February 1 2011 14:47

    The upheaval in Tunisia and now Egypt has important economic and financial implications. About two-thirds of the world’s proven oil reserves and almost half of its gas reserves are in the Middle East; geopolitical risk in the region is thus a source of spikes in oil prices that have global consequences.

    Three out of the past five global recessions have followed a Middle East geopolitical shock that led to a spike in oil prices. In the other two global recessions, oil prices also played a role. The Yom Kippur war of 1973 triggered a sharp increase that led to the global stagflation – recession cum inflation – of 1974-75. The Iranian revolution in 1979 led to a similar stagflationary rise in oil prices that triggered the 1980 recession (a double-dip recession for the US in 1980 and 1982). The Iraqi invasion of Kuwait in August 1990 led to a spike in oil prices at the time when the savings and loan crisis was already tipping the US into a recession; the US and most advanced economies then entered a short recession that lasted until the spring of 1991, when the war against Iraq was won. Even in the 2001 global recession – triggered by the bursting of the technology bubble – oil played a modest role as the second Palestinian intifada and broader Middle East tensions led to a modest but significant increase in prices.
    In depth: Egypt in turmoil - Jan-27
    Three scenarios for Arab world’s trendsetter - Feb-01
    Focus turns to life after Mubarak - Feb-01
    Video: Cairo march a ‘step-change’ - Jan-26
    Banks weigh risk of capital flight - Feb-01
    Mubarak vows to hang on until election - Feb-02

    Oil prices were also significant in the most recent global recession. The US entered a recession in December 2007 following the subprime bust, but this became global only in the autumn of 2008. This global recession was not triggered only by the collateral damage of Lehman’s bankruptcy. By the summer of 2008, oil prices had doubled in about 12 months, reaching a peak of $148 a barrel. That was a massive negative terms of trade and real income shock not just for the US, most of Europe and Japan but also for China and all the other net oil/energy-importing emerging markets. An already fragile global economy was tipped into an outright global recession.

    We do not know yet how far the political contagion in the Middle East will spread in the region and even beyond (could a major oil producer such as Venezuela be the subject of a “jasmine” revolution?). Nor do we know whether the risk of disruption in the supply of oil will lead to a significant increase in prices. Even regional political turmoil that does not disrupt oil supplies directly can increase prices – as during the 2006 war between Israel and Hizbollah in Lebanon, when they jumped briefly from $60 to $80.

    But there is a risk that the assault on Middle Eastern autocracies will lead not to stable democracies but to more radical and unstable regimes. Of course, no one should have sympathy for rulers associated with corruption, poverty, high unemployment rates and income inequality, and one would hope that the events in Tunisia and Egypt lead to free elections and governments representing the needs and aspirations of the oppressed masses. But the recent experience of “free elections” and “democracy” in the Middle East has been disappointing: the Iranian revolution has led to an authoritarian and oppressive regime controlled by Islamic fundamentalists; Gaza’s election led to the rise of the radical Hamas; Lebanon has seen the rise of Hizbollah, a radical and well-armed state within a state; and the US invasion of Iraq has brought civil war and an unstable pseudo-democracy now increasingly at risk of being controlled by radical and Shia groups.

    There are other dangers in the region: the risk of a military confrontation between Israel and Iran on the issue of nuclear proliferation; the unresolved Israel-Palestinian conflict; a Turkey that is geostrategically disengaging from the west and in diplomatic conflict with Israel; and restive Shia minorities in Bahrain, Saudi Arabia, Yemen and other Sunni regimes. Now political turmoil in Tunisia and Egypt appears to be spreading to Jordan; Algeria, Morocco, Yemen, Bahrain and even Saudi Arabia and Syria could be next.

    Even before the recent political shocks in the Middle East, oil prices had increased above $90, driven not only by the fundamentals of a global economic recovery but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets amid near-zero policy rates and quantitative easing in advanced economies; momentum and herding behaviour (as in 2007-08); and limited and inelastic supply of new oil capacity. Now oil prices are skirting closer to $100 a barrel.

    This rise – and the related increase in other commodity prices, especially food – pushes up inflation in already overheating emerging market economies where oil and food prices represent up to two-thirds of the consumption basket; it is also a negative terms of trade and disposable income shock for advanced economies that are barely out of the recent recession and experiencing an anaemic recovery. Given the slack in goods and labour markets, the increase in commodity prices may lead only to first-round inflationary effects, with no second-round knock-on effects on core inflation. But if oil prices were to rise much further, these economies would slow down sharply and some might even experience a double-dip recession. Finally, rising commodity prices increase investors’ risk aversion and may lead to a reduction in consumer and business confidence that is both negative for financial markets and the real economy.

    One may hope that the events in Tunisia and Egypt will lead to a smooth transition to stable and democratic new regimes. But the risk of more unstable and radical outcomes cannot be ruled out. Such turmoil and the ensuing risk of further sharp increases in energy prices is a serious risk to a global economy that was only tentatively recovering from its worst financial crisis and recession in decades.

    The writer is chairman of Roubini Global Economics, professor at the Stern School of Business, NYU and co-author of ‘Crisis Economics’
  4. Stagflation is a possible outcome for the current global economy. If the US were to initiate a large scale public works project akin the the Hoover dam the outlook would change. In Japan the years and years of stagflation were difficult on the culture and economy. There was little geographical area to develop since the vast majority of the country is urbanized. The US has an opportunity to work themselves out of the situation. A high speed rail system still needs to be constructed. Updating of the infrasctructure would chip away at the economic issues by making the country more efficient.

  5. Swarm


    Peak oil is virtually here :-

    Recent news snippets are all softening us for the bad news that will probably come either this year or next. There's a lot of debate by economists that the oil price spike in July 2008 actually caused most of crash.

    Even if turmoil in the middle east doesn't disrupt supplies, we've got no spare capacity and rising demand from India and China. On top of that you've got declining production of cheap oil worldwide.

    No growth and rampant inflation of fuel and food is the most positive outlook. US and European sovereign defaults are probably more likely. Global wars and starvation are not inconceivable.
  6. what makes people believe in peek oil is there any empirical evidence? oil and gas reserves increase every year
  7. Swarm


    Well when I take my first sip from my pint of beer I know that supply is finite and at some point it will run out. When it's full, I'm not concerned, towards the bottom disappointment sets in.

    What evidence to you need ? Very little new oil has been discovered since the 1970's, existing fields are maturing and are at peak flow or declining. We thought the Saudi's had plenty of spare capacity and could make up for declines elsewhere but that turns out to be a lie. Global peak production probably occurred in 2006 and yet we've got rising demand from China and India.

    A recipe for sustained depression and unaffordable fuel and food globally. The decline in living standards will either be gentle and painful or sudden and catastrophic depending on how quickly production falls away.