Monday, January 28, 2013

Stagreflation?

With the fiscal cliffs of insanity and the debt ceiling circus finished (for now), government spending should continue to hold steady as it has since 2010.  This will be quite an austere measure in light of a recently stagnant unemployment rate.
Year-over-year percent change in federal government expenditures (blue) and federal government debt (red)
Unemployment rate remains at about 7.8%.
The Federal Reserve wants a 6.5% unemployment rate.  Looking at past recessions marred by high oil prices, I don't see the justification for 6.5% - at least within the next two years.  Are higher oil prices going to create enough inflation to move the unemployment rate lower?  Or might oil prices decline?
Inflation for consumer prices.
During the recession, asset (debt) prices and oil prices plummeted.  However,  oil prices have recovered and taken off to new heights (on an annual basis), whereas the central bank is attempting to reflate asset prices.

I have put together a graph which I believe helps illustrate some of the similarities between the 1970s stagflation and what I see as today's stagreflation - high stagnant unemployment due to central bank reflation of asset prices.  The chart is oversimplified and exaggerates certain events, but I hope it illustrates the greater concept of capital flow.
Unemployment shocks since the non-gold petrodollar flow.
 I think in both cases (late-1970s and mid-2000s), rising inflation was due to the petrodollar flows - which increased in volume due to the rising price of oil.  In the latter case, a small recycling of trade dollars from China might also be responsible, but I think Chinadollars were not as significant.   In the 1970s, high unemployment was blamed on high inflation.  This time around I think we are going through a type of reflation in which the central bank is inflating asset prices back to their former hyperinflated prices.
 

No comments:

Post a Comment

Post a Comment