they're chatting up stagflation on cnbc...

[sbw]

(I'm thinking about an impromptu tailgate party for the fed meeting. maybe I'll get some wings.)

"the way that they fought stagflation in the 70's was by raising interest rates" --some random guy on cnbc

bill bonner and others think that if they do that this time, the housing market will utterly collapse. yet, if they don't raise rates, inflation goes up a lot, right?

I'm certain that I can learn more about the topic just by creating this thread, so thats what I did.

Scott

[mancroft]

(I'm thinking about an impromptu tailgate party for the fed meeting. maybe I'll get some wings.)

"the way that they fought stagflation in the 70's was by raising interest rates" --some random guy on cnbc

bill bonner and others think that if they do that this time, the housing market will utterly collapse. yet, if they don't raise rates, inflation goes up a lot, right?

I'm certain that I can learn more about the topic just by creating this thread, so thats what I did.

Scott

Stagflation... yes, a "new" phenomenon in the 70s. I remember when it came out the economists were totally baffled as to what to do.

They don't necessarily have to raise interest rates to control it.

They could simply burn all banknotes in circulation. (Or turn them into note paper.)

[ImpendingDoom]

I have heard discussions of two types of inflation: there is a monetary kind that is caused by too much easy money in the economy, and there is sort of a more legitimate kind caused by a shortage of various basic raw materials, (e.g., oil, timber, metals). It seems clear that we are experiencing the latter, due to the growth of the Indian and Chinese economies. I think the Fed understands that raising interest rates is more effective for addressing the former kind of inflation. The mistake in the 70's was that raising interest rates stifled economic growth, but had little effect on the price of oil. I don't think Carter gets enough credit for his energy conservation efforts, which helped bring oil prices back down and remove the underlying cause of the inflation. (Of course, just the high prices on their own would have resulted in more conservation eventually.) Reagans' supply side policies helped bring growth back to the economy as well.

I think the Fed will have to stop the rate hikes fairly soon.

[thelastsortasane1]

We are already well into a stagflation cycle, IMO. The talking heads on CNBC always say one of two things:

something diametrically opposite what is really obviously going on, or
they say what is going on, but in a "no shit sherlock" 2 years behind the rest of us getting it sort of way.

Remember, kids, inflation is low-oh, that health insurance that gets jacked up 50% every year, that $3 gas, those ridiculous food hikes, that ridiculous tuition, those out of control housing prices, they don't really count as part of the cost of living, you silly plebs.

THis country has been completely destroyed the last few years, but there won't be an overnight collapse, the elites seem to be engineering an Orwellian slow burn to keep at least some potentially angry people from catching on. THey are pulling rabbit after shrinking rabbit out of a hat to keep the markets just happy enough. Now, wasn't Big Brother generous to increase our chocolate ration from 30 grams to 20 grams? Back to work, proles!-quit thinking! Hey, if your job getsd sent to China, you just need to retrain, and you can get money for living expenses in the meantime from a nice home equity loan or just good-old plastic.

[ptGatsby]

bill bonner and others think that if they do that this time, the housing market will utterly collapse. yet, if they don't raise rates, inflation goes up a lot, right?


Inflation is already way up. But its not impacting the average person, apparently. If you track the inflation amounts, it seems like its perfectly under control.

Curious, when you think about it. The raw price of every single commodity on this planet has risen significantly. Oil, metals...

Look at steel; http://www.cruspi.com/
Look at oil; http://futures.tradingcharts.com/chart/CO/M
Look at uranium; http://www.uxc.com/review/uxc_Prices.aspx

Just what exactly has decreased in prices? These are tangibles. These are energy costs, production costs.

There are only two... well, three... possible explanations;

1) Prices have decreased outside of... umm... tangibles... (wage gap)
2) People are buying less... (or cheaper alternatives)
3) The official numbers are lies.

The most basic logic is needed to see that something is wrong with the current inflationary environment.

This is not stagflation. Stagflation requires prices to hit consumers. You cannot have stagflation when corporate bonds only return 6-11%.



They don't necessarily have to raise interest rates to control it.


The underlying theory is that inflation forces people to spend money in order not to hold on to ever decreasing cash. If you have inflation without growth - that is, a shrinking economy and devaluing cash, there is no remedy.

It mirrors the exact situation that happens when resources decrease... prices rise and no wealth is created. Unemployment rises. But the fixes don't work; they are the cause of the distortion.



I remember when it came out the economists were totally baffled as to what to do.


They still are. Keynesians have never been able to explain how this is possible.

In short, it is a fundamental flaw with the monetarists and keynesian theories.



Remember, kids, inflation is low-oh, that health insurance that gets jacked up 50% every year, that $3 gas, those ridiculous food hikes, that ridiculous tuition, those out of control housing prices, they don't really count as part of the cost of living, you silly plebs.


Exactly. For the past while, the CPI numbers have been totally out of whack.

To paraphrase: "Oil inflation hasn't hit the consumers because when oil prices rise, more people bike. So oil prices haven't caused any inflation".

I just have to say... WTF? Of course CPI numbers don't go up when you change the % of a household bill down when prices rise.




The mistake in the 70's was that raising interest rates stifled economic growth, but had little effect on the price of oil.


Not a mistake... that is exactly what has to happen. If the government didn't, no one would buy their bonds.

Markets set the interest rates, not governments. If you simply print money in order to pay your debts... well, that's inflation. If you hit hyperinflation, the game is up. If you try to borrow money, you need to pay more in interest than inflation... otherwise no one lends it to you.

There is no solution to the monetary problem. Inflation is always contained within markets... we call them bubbles... but it all comes down to the same thing. Too much money chasing too few resources! Producing more money resolves nothing.

In the end, the only way the distortion can end is if bad money gets destroyed. Creating more inflation creates more bad money... it solves nothing. The distortion grows... But increasing interest rates drives capital reinvestment and destroys the 'bad money' circulating too fast. That is to say, higher interest rates prevents money from being created easily.



I don't think Carter gets enough credit for his energy conservation efforts, which helped bring oil prices back down and remove the underlying cause of the inflation.


I'm fairly sure that the underlying problem of inflation had to do with the brenten woods agreements, not oil. Oil simply caused the distortions to the surface.

You can see the inflation rates here;

http://www.minneapolisfed.org/Research/data/us/calc/hist1800.cfm

If you graph it, you end up with a nearly flat inflation rate until the 1950s or so, increases a bit until 1970, then takes off like a banshee. And it hasn't stopped since.

I generally can't conclude anything other than the basic; fiat money will always be prone to these problems. Force monetary growth will always cause this distortion. It cannot handle shock and the smaller distortions will always add up to bigger ones over time.

[coffeezombie]

Moved to The World.

[Ferrus]

They could simply burn all banknotes in circulation. (Or turn them into note paper.)
Or just adopt supply-side policies. :)