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Friday, June 13, 2008

Stagflation: Negative Expectations Spiral?

Today we learned that inflation jumped by .6% in May, the largest jump in about 6 months.

We learned last week or so that unemployment and jobless claims spiked (unemployment grew month-to-month by the biggest amount in about 2 decades).

We also learned that the stimulus package had a significant effect on consumption last month.

But that news was not nearly as widely reported because of this reason.

But the news about how the stimulus was worsening our deficit was widely reported.

What does all this mean?:
rising unemployment, falling output, rising prices due to energy shortfalls?
Stagflation of course.

The potential stagflation is in my opinion more interesting than that of the 70s though because you have the demand-side problem of the housing crisis and the confounding factors of the
"war(s)" in Afghanistan and Iraq, and a political election pitting different ideas of how the government should intervene to aid the economy.

Should there be more stimulus, to whom should it go to, and in what ways will that worsen the inflation problem, and if it does worsen the inflation problem (while at the same time not being strong enough to positively affect output) can that lead to a decline in consumer confidence (especially since the only news we tend to hear about the economy is bad news) thereby further worsening the demand-side problem... and the spiral continues....

And what if the Iraq situation worsens, or what if Al Quadea emerges from Afghanistan, and what if, what if, what if??? I don't bring this up to set off an alarm or anything, I simply bring it up to draw attention to the fact that there are so many different variables pulling in opposing directions and so many confounding ones now that it is impossible to really guage where we are at, let alone where our economy will be a year from now.


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