Days of Change

Day 354 – Stagflation, a Love Story

October 24, 2009

For the last few months, glowing economic data has been combined with regular “unexpected” negative reports on business and employment. So, how do these things go together? Is someone lying? Is this bad or good?

It turns out that yes, the media is lying to you. In a strict sense they are providing “real” data. They are presenting it in a process called cherry picking. You pick the stories that support you and throw out the ones that don’t. The problem is that certain data, like the monthly jobs survey and unemployment figures are benchmarks that tend to defy cherry picking. Those figures are showing job losses steady and unrelenting.

There’s another figure as well. The Dow Jones Industrial Average is a number that calculates the value of certain representative stocks in the economy. That number is thousands of points below its highs, a few thousand above its lowest lows this year and around 3% above where it was last year at this time. The rise in stock prices, however, tracks with an increase in gas prices as well. That seems a lot like inflation.

Inflation is a process where weak currency is propped up, making it worthless. Let’s say that you want to buy a widget. At the store, it costs $1. But that $1 is considered less powerful in the rest of the world and the next shipment of widgets is higher. Now the store sells it for $2 because of what it paid to get it. Normally, this is not too bad. A loaf of bread used to be 25 cents and people used to make $50 a week. When wages rise, it tends to counteract the effect of inflation.

Then the Carter Administration created an effect known as stagflation. Inflation occurred in currency, but the economy remained stagnant. Prices went up, but the ability to pay did not. It restricted spending and made the financial environment even worse.

The current Carter-style administration is becoming worried about the possibility of stagflation. Since things are looking rough for the economy, and more importantly to Democratic party coffers, a push has started to force banks to loan to business. This is definitely an inflation tactic, but the hope is to bring economic growth as well.

So, does anyone ever deflate? Reagan did. When you cut taxes, the pressure to raise prices and wages starts to lessen. In a stagnant economy, it makes it possible to lower prices. An atmosphere is created to increase employment and grow the economy.

This is why I still think Keynesians are idiots. Solving a housing bubble by blowing a big deficit bubble is asking for inflation. The current stimulus is disproportionately impacting the rich. States with the lowest unemployment rates are getting the most stimulus employment and vise-versa. Government employees making over $40,000 a year are getting a reprieve. The problem is that most people in the country make less than that. The “rich” people who would get tax breaks are frequently business owners who pay less than $40,000 to the employees they do and will hire.

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