The Specter of Stagflation

"But persistent inflation???the general rise of most prices???has only one cause: too much money chasing too few goods. It's not a random accident or an act of nature. The Federal Reserve regulates the nation's supply of money and credit. The Fed creates inflation and can control it."

So Samuelson thinks the Fed can control oil prices or the price of corn with monetary policy? Inflation in this case is caused by too few goods (period).


"But so far, the lower inflation hasn't materialized in part because, outside of housing, there hasn't been much of an economic slowdown. "

Guess Samuelson hasn't been following the auto industry lately. Or retail.

The Fed has tied its own hands and the country will have to weather this recession/depression for as long as it takes a recovery to start. (which usually means housing, so it's going to be a long wait.)

The latest rip off of tax payer. Tax cut rebate checks. This is trickle down economics. the Republican elephant is constipated.Gas prices rose as soon as tax rebate passed.Depression is within reach. WE need a tax hike big time and suffer for year. Tax cut is B S .

I hope that you all learned a lesson and do not vote for McCAIN.
McCAIN is not economically grounded and will continue BUSH policies. ECONOMIC FEUDALISM. STAGFLATION OCCURS WHEN THE GOVERNMENT RIps off it's own people and medals to much with the FED. THE FED reduce interest rates again.

THE MEDIA LOVES TO create a crisis and a panic, because they are controlled by the same entities that want the "average JOE"S" to spend at all COSTS. IT is a REFLECTION OF THE BUy AT ALL COSTS ATTITUDE OF THIS ADMINISTRATION AND GREEDy INVESTORS. TOO MUCH MEDALING. THE MARKET MUST SUFFER A LITTLE, WHAT GOES Up MUST COME DOWN. IT iS A NATURAL CyCLE. INTEFERING WITH THE CyCLE over and over again will cause weird things to happen like STAGFLATION.

The present increased demands for credit are the result of the irresponsible fiscal practices of the federal government (Bush had the 5 largest budgets ever). Bush's borrowings have been to non-productive recipients & to finance "DEAD-WEIGHT" MILITARY HARDWARE. Since the goods and services being financed by these monstrous deficits are not offered in the marketplace, enormous inflationary pressures are generated in the economy.

Prorating the federal deficits over the entire spectrum of federal expenditures, it can be said that virtually all of the current deficits are attributable to DEFENSE SPENDING, MILITARY and civil service pensions, interest on the debt, and welfare and unemployment benefits. Social security is not included in the above list since only a very small proportion of social security benefits are financed from nonsocial security taxes. From an economic standpoint, only interest is ???untouchable???.

From the historical perspective, remember that the PENTAGON???s excessive U.S. government unilateral transfers to foreigners (re: foreign policy ??? our far flung military bases and personnel) was soley responsible for decoupling the dollar from gold in 71 (soley responsible for our current account deficit up to 76) During all this time the private sector was running a surplus in all accounts: merchandise, services and financial (up to 76).

The more alarming aspect of the deficits is not the effect on interest rates but the effect of high interest rates on the level of taxable income and the volume of taxes required to service a cumulative debt now exceeding $9.1 trillion. Both high interest rates and high taxes induce STAGFLAION, thus eroding the tax base and increasing the volume of future deficits.

The rising cost and diminishing volume of imports will contribute to an increase in inflation, and the expectation of further inflation will also push up interest rates. This spells STAGFLATION.

The author affirms the primacy of the Philips curve, stating that any deviation from the inverse relationship of unemployment and inflation that it predicts is necessarily temporary.

He implies that the main driver of prices is labor costs, and that the main driver of stagnation is high interest rates. But inflation and stagnation each have other causes, and these other factors are in fact the reason that we now have both high unemployment and high inflation.

One such factor is the decline of the dollar, which increases the cost of imports. This is significantly due to U.S. borrowing, which in turn is significantly due to
the wars in Iraq and Afghanistan. To put this in another way: you cannot throw large amounts of our nation's productive capacity into non-consumable and non-exportable (i.e., military) production without creating a scarcity of consumable / exportable goods relative to the wages that have been paid in order to produce those goods. Although you can temporarily borrow from abroad to prevent the population from waking up to its impoverishment (and run up a trade deficit by backfilling U.S. consumer goods with Asian replacements), ultimately other nations will not tolerate unlimited deficits.

The cumulative trade deficit (nearly 7 trillion) has placed large numbers of dollars in the hands of foreigners, who have experienced significant inflation in their own economies as a result of paying their workers to make goods that they cannot buy with their paychecks because they have been exported to us. Increasingly, they want something real in exchange for that money, and their recent purchases of U.S. commodities (especially grain) have created scarcity that has driven domestic inflation.

NAFTA, CAFTA, etc., allowed U.S. corporations to export our manufacturing jobs overseas and ship back products to the U.S. market. This has contributed to the trade deficit, and also to the "stagnation" part of "stagflation." As a result, even with the dollar in decline, the possibilities of an export-driven recovery are nonetheless bleak.

Finally, as long as we are talking about labor costs, shouldn't we also mention outsized corporate profits and executive compensation as significant drivers of inflation?

In short, we have been spending beyond our means, and we have been reducing those means by exporting jobs, and so we have been borrowing money and importing goods, and the world is getting sick of us because we are deadbeats and because we are creating a public nuisance with the military that we have funded through our borrowing from them. And so they are pulling the rug out, and much as I would like to implore them not to do so, on what basis could we even begin to argue for such kindness?

In the face of these realities, Mr. Samuelson asks: should the Fed lower interest rates or raise them? This is like asking whether the driver of a runaway train should put out his left foot or his right foot in order to stop it

Right. The last time we had stagflation it was triggered by the Johnson and Nixon administration decision to fund the Vietnam War with deficits. This was done for the obvious reason that the general public didn't see the benefit to be had from the conflict, and didn't want to pay for it.

It should be noted that Samuelson has repeatedly assured us that the cost of this war is no big deal. Time to come clean, pal.

The Fed os walking a tightrope because it is being asked to print money to compensate for massive federal borowing to finance the budget deficit. Slashing federal spending (just for starters, corporate welfare is estimated by both liberal and conservative groups at $100 billion per year) would be a non-inflationary way of making more credit available.

The Fed is walking a tightrope because it is being asked to print money to compensate for massive federal borrowing the finance the budget deficit. Slashing federal spending (just for starters, end corporate welfare, estimated by both liberal and conseravtive groups at $100 billion/year) and balancing the budget is a non-inflationalry way to make more credit available.