-->(bin zwar anderer Meinung, aber das macht ja nix ;-)
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<font color="#002864" size="1" face="Verdana">http://www.mises.org/fullstory.asp?control=1181</font>
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<font face="Verdana" size="2"><font color="#002864" size="5"><strong>The Return of Stagflation</strong></font>
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<font size="4">by Nicolas Bouzou</font>
<font size="2">[Posted March 13, 2003]</font>
<font size="2">![[image]]([/img] Many<br />
people believe that the world economy is undergoing pressures of a<br />
deflationary nature. It is true that a recessionary environment dominates<br />
industrialised countries (at least in America, Europe and Japan). However,<br />
this is coupled with price increases in several important market sectors in<br />
both wholesale and retail sectors. The real risk lies more in stagflation than<br />
deflation.</font><br />
<br />
<br />
<br />
<br />
<font size="2">Stagflation is a term that originated in the early 1970s to<br />
identify the simultaneous occurrence of recession and inflation—a phenomenon<br />
that Keynesian theory had previously suggested was impossible. In Keynesian<br />
theory, recessions (and the unemployment implied by them) are cured by<br />
inflation, while inflations are cured by recessions. When both occur at once,<br />
the theory is not only seriously challenged, but fiscal and money mangers are<br />
at a loss concerning what to do next. </font><br />
<br />
<br />
<br />
<br />
<font size="2">The industrialized world is reaching just such a policy dead<br />
end, with central banks at a loss as to what to do besides lowering<br />
rates further and having legislators attempt endless rounds of fiscal<br />
stimulation. </font><br />
<br />
<br />
<br />
<br />
<font size="2">Since 2000, monetary policies have been strongly<br />
expansionist. To fight bear markets and the slowing of GDP, central banks have<br />
chosen to inject liquidity in the banking system. The Fed and the ECB have cut<br />
their interest rates and have multiplied and intensified open market<br />
operations. This policy was facilitated by the increase, or the reappearance<br />
in the case of the United States, of budget deficits at the federal level.<br />
These policies have done nothing to forestall the advent of stagflation. </font><br />
<br />
<br />
<br />
<br />
<font size="2">One way central banks create money is the purchase or sale<br />
of government bonds. To purchase these assets, central banks write out checks<br />
to bond dealers who deposit the new liquidity at commercial banks</font><a title href="http://www.mises.org/fullstory.asp?control=1181#_ftn1" name="_ftnref1"><font size="2">[1]</font></a><font size="2">.<br />
If deficits financed by bonds are not theoretically inflationary, they permit<br />
central banks to generate inflation more easily. For example, on February 25,<br />
2003, the FED bought $750 million in debt. So, if we think of inflation in its<br />
classical sense (an increase in the quantity of money), deflation is logically<br />
impossible.</font><br />
<br />
<br />
<p align="center"><font size="2">[img]) </font>
<h2 align="center"><font size="2">![[image]]([/img] </font></h2><br />
<br />
<br />
<font size="2">The slowing down of M2 (in US and Japan) means that banks<br />
are limited in their ability to expand credit distribution because of<br />
bankruptcies, bad debts, and the decrease in their equities, a usual feature<br />
of this period of the business cycle. But in no ways does this mean that the<br />
money supply is declining </font><a title href="http://www.mises.org/fullstory.asp?control=1181#_ftn2" name="_ftnref2"><font size="2">[2]</font></a><font size="2">.</font><br />
<br />
<br />
<br />
<br />
<font size="2">Where, then, do the new liquidities go? The theory<br />
cannot tell us the answer. In fact, we can see strong hikes in prices in<br />
several markets. But these are not given publicity, because they typically do<br />
not concern the consumers directly. </font><br />
<br />
<br />
<br />
<br />
<font size="2">The price of industrial raw materials increased by 3.3% in<br />
January compared to December, and 13.5% year on year. The monthly index HWWA<br />
has been increasing since September 2002. Producer prices increased by 1.9%<br />
between December and January. It is the strongest monthly increase since<br />
January 2001. Year on year, the rise reaches 5.4%. </font><br />
<br />
<br />
<p align="center">[img])
<font size="2">The rise in housing prices is astonishing in the United
States, United Kingdom and Spain. A bubble is forming here too, that will
burst when long term interest rates rise or when the unemployment rate is so
high that it impairs household marketability. The bursting of the bubble will
have a negative impact on consumption (because of the wealth effect) and on
bank solubility (which could lead to a credit crunch).</font>
<font size="2">Another bubble is forming in the public bond markets. Since
the equity market burst in 2000, dealers and banks have been using their
liquidity to buy assets that offer quasi-certain performance. The price of US
10 year bonds has been soaring.</font>
<font size="2">The figures do not reveal strong increases in the prices of
manufactured consumer goods in countries where pricing power is weak, in
particular because of the slow down in wages and the increase of unemployment.
In these countries, the adjustment is carried out by a contraction of
corporate profits. On the other hand, the inflationary tensions have appeared
in services, in particular in Europe where this sector is not very competitive.
The effects of monetary inflation can be hidden by the progression of
productivity.</font>
<font size="2">More significant for Austrian economists: the spectacular
increase of gold prices (in US dollars). Among the liquid assets (risk
adjusted), gold is at the moment one of the most profitable assets in real
terms. It is highly unusual that gold and bond prices increase at the same
time.</font>
<p align="center">[img][/img]
<p align="left"><font size="2">Certain observers assert that expansionist
monetary policies have been preventing a more severe depression. It is true.
For instance, if the central banks had not flooded the financial market with
so many dollars, euros and yens, the collapse of the equity market (and of
production, investment and profits) would have been more pronounced. But the
problem with monetary policy is that it slows down the readjustment of the
structure of production toward a configuration respecting the time preference
of consumers</font><a title href="http://www.mises.org/fullstory.asp?control=1181#_ftn3" name="_ftnref3"><font size="2">[3]</font></a><font size="2">. </font>
<p align="left"><font size="2">Today, the overinvestment in equipment and
software has not been wholly purged (the rate of capacity utilization is
historically weak). Household debt is increasing faster than
disposable income. Thus, if an expansionary monetary policy is pursued, 2003
won't be a year of recovery in the United States, Europe, or Japan, even
if certain quarterly GDP figures turn out to be surprisingly strong. Let us
remember that the National Bureau of Economic Research dates the end of the
last recovery and beginning of the contraction as March 2001, and it has
yet to call a bottom. </font>
<p align="left"><font size="2">As for the future of interest rates, we cannot
rule out a rise in nominal interest rates due to inflationary expectations.
Such a rise would entail a burst of the housing bubble and a strong decline in
bond prices with negative impact on household wealth and bank solvability. The
only solution would be to stop the monetary inflation. The recession and the
equity market crisis would be sharp, but short. If this solution is not
adopted, the world economy will perform badly for several years. We have not
finished paying the consequences of our international monetary system based on
fiat money.</font>
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<font size="2">Nicolas Bouzou is an economist at a private institute
in Paris. Send him MAIL</font>.
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<div id="ftn1">
<a title href="http://www.mises.org/fullstory.asp?control=1181#_ftnref1" name="_ftn1"><font size="2">[1]</font></a><font size="2"> This
process is detailed in Murray Rothbard, The
Case Against the Fed, Ludwig Von Mises Institute, 1994.</font>
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<div id="ftn2">
<a title href="http://www.mises.org/fullstory.asp?control=1181#_ftnref2" name="_ftn2"><font size="2">[2]</font></a><font size="2"> For
explanations about the choice of a good money supply indicator, see
Nicolas Bouzou, How should
we Define the Money Supply, Ludwig Von Mises Institute Working
Paper.</font>
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<div id="ftn3">
<a title href="http://www.mises.org/fullstory.asp?control=1181#_ftnref3" name="_ftn3"><font size="2">[3]</font></a><font size="2"> On
this subject, see Ludwig Von Mises, The Theory of Money and Credit,
Jonathan Capes, 1934 ; On the Manipulation of Money and Credit,
Free Market Books, 1978 ; Human Action, Yale University Press,
1949. For an empirical illustration, see Murray Rothbard, America’s
Great Depression, Ludwig Von Mises Institute, 2000.
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