Undecided
08-11-04, 04:21 PM
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:
It is not that inflation has disappeared. So far this year, consumer prices have risen at an annual rate of 4.9%. About half of this increase was due to higher energy costs, which rose at an annualised rate of 36% in the first half of the year.But though the impact of the high oil price on inflation may be troubling, more worrying is its impact on consumption. Higher pump prices are curbing consumer spending, which is depressing sales. Falling sales are discouraging hiring, which is adding to consumers’ reluctance to spend. In June, consumer spending fell by 0.7%. In July, hiring slowed to a trickle: just 32,000 workers were added to the payrolls. The links are more immediate in some industries than in others: 2,600 petrol-pump attendants lost their jobs last month.
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But what counts as rash, and what counts as measured, depends on your reading of the economy. In its report to Congress, submitted on July 20th, the Fed predicted that real GDP would likely grow by 4.5-4.75% between the fourth quarter of last year and this. Already, that prediction looks in jeopardy. To fulfil it, the economy would now have to grow by around 5.25% (at an annualised rate) for the rest of the year.
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Indeed, statistical revisions released last Friday eliminated 61,000 jobs the economy was thought to have created in May and June. Forget outsourcing, offshoring and cost-cutting—the most potent destroyer of jobs in the past couple of months has been the Bureau of Labour Statistics.
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By contrast, the man defending that election has no choice but to be proactive. But what George Bush does between now and November to revive his reputation for economic management is not clear at all. At the start of the year, his Council of Economic Advisers hoped that the number of Americans on the payrolls would average 132.7m for this year, a higher total than when Mr Bush took office. But the economy is lagging far behind that prediction, with no chance of catching up before the election.
http://www.economist.com/agenda/displayStory.cfm?story_id=3082696
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.
It is not that inflation has disappeared. So far this year, consumer prices have risen at an annual rate of 4.9%. About half of this increase was due to higher energy costs, which rose at an annualised rate of 36% in the first half of the year.But though the impact of the high oil price on inflation may be troubling, more worrying is its impact on consumption. Higher pump prices are curbing consumer spending, which is depressing sales. Falling sales are discouraging hiring, which is adding to consumers’ reluctance to spend. In June, consumer spending fell by 0.7%. In July, hiring slowed to a trickle: just 32,000 workers were added to the payrolls. The links are more immediate in some industries than in others: 2,600 petrol-pump attendants lost their jobs last month.
-------------------------------------
But what counts as rash, and what counts as measured, depends on your reading of the economy. In its report to Congress, submitted on July 20th, the Fed predicted that real GDP would likely grow by 4.5-4.75% between the fourth quarter of last year and this. Already, that prediction looks in jeopardy. To fulfil it, the economy would now have to grow by around 5.25% (at an annualised rate) for the rest of the year.
----------------------------------
Indeed, statistical revisions released last Friday eliminated 61,000 jobs the economy was thought to have created in May and June. Forget outsourcing, offshoring and cost-cutting—the most potent destroyer of jobs in the past couple of months has been the Bureau of Labour Statistics.
----------------------------
By contrast, the man defending that election has no choice but to be proactive. But what George Bush does between now and November to revive his reputation for economic management is not clear at all. At the start of the year, his Council of Economic Advisers hoped that the number of Americans on the payrolls would average 132.7m for this year, a higher total than when Mr Bush took office. But the economy is lagging far behind that prediction, with no chance of catching up before the election.
http://www.economist.com/agenda/displayStory.cfm?story_id=3082696
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.