Worry about stagflation, a flashback to '70s, begins to grow

Until about 50 years ago, economists viewed stagflation as a near-impossibility. They hewed to something called the Phillips Curve, named for its creator, economist A.W.H. “Bill’’ Phillips (1914-1975) of New Zealand. This theory held that inflation and unemployment move in opposite directions.

You can throw this in the trash with the "Laffer Curve" that gave birth to trickle down economics.

Unfortunately the latter is still being hawked by many politicians in the USA and Japan.

Plaza Accord was created by the US to force Japan to pay back the American investments, so stagflation in the West could be eased. Ronald Reagan's administration took one step further to permanently destroy Japan's economy.

https://michael-hudson.com/2021/10/we-make-the-rules/

The same thing in Japan. In 1985, when there was the famous Plaza Accord, you had Reagonomics going full blast. And Secretary of State James Baker said, what is Reaganomics? It means we want low interest rates; we want to cut taxes on the rich, and even though we’re going to cut taxes, we’re going to have a huge budget deficit.

Somebody is going to have to fund this. And in the past, countries running a budget deficit, which Reagan and Bush quadrupled America’s foreign debt from 1981 to 1992 – who is going to buy this debt? Because if we make Americans buy this debt, we’re going to have to pay high interest.

So it told Japan, we want you to agree to buy a big chunk of our foreign debt. England and Europe said, ok, we’re going to go along and we’re going to buy a big chunk of it too.

So essentially, America forced Japan not only to buy the debt, but to revalue its currency. And its currency went from 240 yen per dollar to 200 yen, meaning a dollar would only buy 200 yen. And then finally, America would only buy 100 yen.

And all of a sudden, car prices, electronic prices in Japan, export prices doubled; it lost the market. And essentially went broke.

And that was what was called the bubble economy. The Reagan economy was a bubble economy in America, but the bubble was felt or absorbed by Japan, by England, and by Europe.

That was the the genius of Reaganomics, to make other countries bear the costs of the American tax cuts.

BEN NORTON: Professor Hudson, this is an article I have up here in The Wall Street Journal in 2018, titled “The Old U.S. Trade War with Japan Looms Over Today’s Dispute with China.”

Do you think there are parallels? I mean, clearly Japan has been a key U.S. ally since World War Two, whereas China has become a serious adversary. So the political relationship between the U.S. and Japan and the U.S. and China is very different.

But do you see parallels between the U.S. policy, economically, toward Japan in the ’80s and now with China?

Japan's Plaza Accord 2.0 was firstly implemented under Abe's administration with Trump. The US will be allowed to flood Japan with American agricultural goods; thus, it severely dampens Japan's food self-sufficiency (it is currently at the lowest level ever). Years of Abenomics have permanently weakened the Yen to allow foreigners to buy up all of Japan's assets, and LDP wants to turn Japan into the UK (laundromats for dirty foreign money as Japanese people will be non-temporary wage slaves for foreigners).

Not just with Japan, the US will do the same thing with all of its "allies" within a few months. A new "Plaza Accord" for all "allies" will be implemented from the EU to the Anglosphere. American corporations will take over everything.

"non-temporary" = temporary

typo error

Care for some views from the past?

Professor Otto Eckstein, the key developer and proponent of the theory of core inflation in 1981, testified before the Joint Economic Committee of the 96th U.S. Congress in 1979, Professor Eckstein described and diagnosed Stagflation, following the stagflation events of 1975 – 77. Transcripts of all of the experts over the problem of stagflation was interesting to read again, and none more so than Professor Eckstein's testimony.

The professor encouraged the members of congress to first understand and disentangle the elements; the core rate, the shock rate and the demand rate.

The core rate is the product of past demand levels and shocks, which have created the price expectations that underlie the trends of unit costs of labor and capital. The shock rate is the contribution of inflation created by exogenous events like world oil and food prices, changes in tax rates and government regulatory and other policies. The demand rate is the contribution to inflation from the level of aggregate demand.

Thus, he stated, that stagflation is typically the combination of high inflation and weak demand, occurs whenever the core rate plus the shock rate exceed the demand rate.

Professor Eckstein encouraged the members to understand that the immediate goal of policy for stagflation should be to “slow down the economy with only a limited business cycle disturbance.”

The solution to the stagflation: more cautious demand management policies to get rid of the demand inflation, increased capital formation and R&D to restore productivity performance and slow the core rate, an energy policy to limit OPEC's power to create oil shocks, greater care in the design of government policies to limit inflationary repercussions, and measures to make the economy more competitive.

And then the professor was blunt.

Stagflation; has become a rallying cry for dissatisfaction with the performance of the American economy and of its economists. People wish to believe that there is some deep mystery about double-digit inflation. I do not believe that stagflation escapes our understanding. The ability to combine high employment and stable prices is rare for any society. The few who have attained it have done so by combining the national determination to avoid inflation with strong government policies to promote industrial development and success in export markets. For the rest of us, the middling and high-inflation countries, strong economic policies have been impossible for reasons of political structure, the pursuit of other national purposes or weakness of leadership.

We will suffer from stagflation until we put stronger economic policies at the top of our priority lists, and even then it will take years to overcome the underlying problems.

History does have much to offer our contemporary economic world.

two jobs for every job seeker in the US economy right now. That's drastically different from the nasty 70s.

Thus, he stated, that stagflation is typically the combination of high inflation and weak demand, occurs whenever the core rate plus the shock rate exceed the demand rate.

Based on that definition I do not think the US or the west face stagflation. Currently demand for goods and services are very high. That is part of the reason, not the whole reason, that the supply chain is in such chaos. The core rate of inflation since 2009 has been hovering around 1% or less. The fundamentals undergirding the global economy remain deflationary. Why? Wealth concentration has accelerated, industry consolidation has accelerated and not unexpectedly the velocity of money continues its long term decline. When wealth is allowed to concentrate it is saved and not spent and you see that in falling velocity of money. It is a symptom of widespread monopoly and oligopoly, both of which are very unhealthy economic situations. If you look at money supply charts you can see the growth rate is mild. You see spikes from stimulus efforts but nothing changes long term. Money is put into the system but it ends up in the bank accounts of wealthy individuals or the ever growing unspent cash balances of major corporations.

What is driving inflation today are twin shocks to the global economy from the Covi-19 pandemic and Russia's war with Ukraine. Both have created massive supply chain shocks with Chinese ports and whole cities shutting down disrupting shipping and industries across the globe combined with consumers substituting their spending from dining out and other entertainment to buying goods. Shipping was swamped by demand right at the very same time it was being disrupted by a global pandemic. When those disruptions work themselves out in the next year or two, the world will return to very low inflation sometimes edging towards deflation.

Inflation is being driven now by shortages - of food, goods and labour. Political policies have caused this and it will continue.

Looking back won't help. We have no historical model for deglobalisation combined with a shift to non-viable nationalist economics. But if you work out what will inevitably happen, none of it is good. Poverty, famine, scapegoating and war are the most likely outcomes.

I can't help but get a good chuckle looking at the photos and seeing cars I had long ago forgotten about, like the lead photo that shows a Checker Marathon taxi, and across the street from the Gulf station a Ford Pinto and what looks like a Buick Riviera sitting behind a huge Oldsmobile, with a Cadillac Sedan de Ville in front of it. In front of the fellow with the lawnmower O_o is what appears to be an American Motors Ambassador (one of the less horrible cars from that era) and poking its nose in from behind is an Alfa Romeo. Next to the Ford pick-em-up truck is a Ford Maverick and across the street next to a phone booth (remember those ?) is a big old Eldorado.

Can we bring back the really long, boat-like cars with bench seating and actual wood steering wheels though?

Can we bring back the really long, boat-like cars with bench seating and actual wood steering wheels though?

I got me a car that's as big as a whale

and it's about to set sail

I got me a car that seats about twenty

so come along and bring your juke box money

The B52s

You can have them. Not for me. The only cars from that era that appealed to me were the BMW Bavaria or Mercedes 250.

This theory held that inflation and unemployment move in opposite directions.

This theory is clearly wrong.

More people working and therefore producing more stuff is not inflationary. More people working increases production. More goods is not inflationary.

Before the pandemic, the US for example had very low unemployment, and very low inflation.

You can throw this in the trash

Agreed there.

with the "Laffer Curve" that gave birth to trickle down economics.

Arthur Laffer drawing that curve on a napkin was not something he invented, but it did get named after him, but “Trickle-down” is a nonsense characterization that long-predates Dr Laffer. The great Tom Sowell’s short article on it is worth a read for a proper history of those arguments:

https://www.hoover.org/sites/default/files/uploads/documents/Sowell_TrickleDown_FINAL.pdf

@fxgai

Yes、please tell me more about how the economic policies of Herbert Hoover and Laffer ( who received a medal from Donald Trump) have helped our economies and resulted in broad based prosperity.

The latest rise in inflation, like the highly accurate term trickle down economics, only result in poverty and pain for the majority of society while assisting oligarchs only.

America can easily bring stamp out stagflation -

increase immigration to lower labour costs

make your vassale states pay more for anything and everything

make everyone fight everyone until they are weak then you go in and grab their stuff

ship your indigent and poor to foreign lands to conquer and pillage. If they die, you solved your problem of having to look after them. If you win, keep them there to collect taxes

increase your prison population because that is legitimate forced slavery

@dagon, wow glad you found the time to read Sowell’s article….

The latest rise in inflation, … , only result in poverty and pain for the majority of society

You are absolutely right here about the harms of inflation.

like the highly accurate term trickle down economics

But your inserting this caricature (as in the Sowell article) into the discussion about inflation seems 180 degrees backwards.

Indeed it was at the same time as inflation was brought under control that Laffer came to prominence… so you seem completely off base about the causes of inflation.

America never left stagflation. Wages did not keep up with inflation for 50 years.