Stagflation

[gfromls]

Just looked up this new word (to me) on google.

Apparently it occurs when the consumer has spent up (i.e. because they have borrowed too much) and the price of natural recourses (oil – metal ect) has risen, thus causing inflation.

The UK had its last dose of stagflation in the 70’s – house prices plummeted.

Any thoughts?

[George Mainwaring]

A likely scenario.

[Guest Charlie The Tramp]

The UK had its last dose of stagflation in the 70’s – house prices plummeted.

I would not say HPs plummeted in the 1970s, more a case of general inflation rising faster than the HPI which skewed as <13% in 1976. Remember that HPI under Heath in 1973 hit 33% that year which was completely unsustainable considering the problems in the economy. As now property appeared to be a hedge against inflation but that blew up with the 1976 figures, returning to an annual >4% under Callaghan`s tenure. Moved from my FTB maisonette to a four bed detached in 1976, could not let that gift horse pass me by while others stood on the sidelines.

[BuyingBear]

The UK had its last dose of stagflation in the 70’s – house prices plummeted.

Any thoughts?

They didn't plummet in real terms, stagflation involves large bouts of hyperinflation which then leaves people with a lower standard of living as their relative incomes decrease in terms of purchasing power, that's why you see people out on the streets with wage demands.

It wouldn't happen today beause the labour market is essentially 'deep', thanks to immigration, out-sourcing and the lack of bargaining power, not to mention an intolerance of protest. Not to mention the fact it would have already happened if it could happen in modern Britain.

Today is quite similar in the 70's in some ways, given the military engagements and soaring cost of crude oil inducing inflation, a lot of this can also be explained by Nixon dropping gold backing for the dollar thus exporting inflation, today's free flowing liquidity and Fed rates dropping to 1% is the modern equivilient.

[Warwickshire Lad]

I think that where we are now is unprecendeted because of globalization.

There are arguments both for hyperinflation and deflation.

The interesting thing is that though $60+ oil and rising energy costs are now looking fairly permanent there's still not a lot of CPI inflation about.

I think that a global financial crisis of some unexpected kind might cause the market to crash.

Been reading a few things recently about what might happen should Japanese interest rates start to rise... perhaps this is the trigger we've been looking for.

The other possibility is what happens to the US economy and what effect the bubble bursting has there.

[BuyingBear]

Been reading a few things recently about what might happen should Japanese interest rates start to rise... perhaps this is the trigger we've been looking for.

Just look at what's occurred in Iceland over the last couple of weeks, the cracks are beginning to show.

[jonpo]

kind of we look to be going into a plain old nasty recession, Keynes would have been proud....

credit will contract but prices will be higher bit like the 70's but more debt inflation06 untill deflation07

[pyewackitt]

I think that where we are now is unprecendeted because of globalization.

There are arguments both for hyperinflation and deflation.

The interesting thing is that though $60+ oil and rising energy costs are now looking fairly permanent there's still not a lot of CPI inflation about.

I think that a global financial crisis of some unexpected kind might cause the market to crash.

Been reading a few things recently about what might happen should Japanese interest rates start to rise... perhaps this is the trigger we've been looking for.

The other possibility is what happens to the US economy and what effect the bubble bursting has there.

Very good article on the global nature of the system and the breakdown here:

http://www.financialsense.com/stormwatch/o.../2004/0804.html

Particularly good are the Ben Bernake comments and the section on the Carry Trade.

- Pye

[RobertPaulson]

There are arguments both for hyperinflation and deflation.

fundamentally I believe both will be (to some degree) correct, hence stagflation. It can be misleading to generalise in terms of inflation or deflation, if you are talking about deflation and then throw in commodity inflation, the layman will jump down your throat with "but I thought you said prices would be falling". IMHO we will face commodity inflation (especially as the UK runs a structural current account deficit), possibly for a time deflation or at least stagnation in goods, services and wages and ultimately currency hyperinflation if confidence in the global financial system becomes destabilised enough as various asset bubbles unwind.

Been reading a few things recently about what might happen should Japanese interest rates start to rise... perhaps this is the trigger we've been looking for.

The USD to 'More or less anywhere' else carry trade has probably been just as prevalent at the YEN carry since 2001, but is hurting much more given the current fed tightening cycle. Hence

Just look at what's occurred in Iceland over the last couple of weeks, the cracks are beginning to show.

The dollar has been on a bull run since Jan05 against almost every major currency, seemingly in suspension of all fundamental drivers on the economic state of USA inc. But if you take the view that fed tightening is putting the run on the USD carry trade, then speculators covering short USD positions could explain this. Perhaps China is actually trying to put the squeeze/front run this by continuing to purchase USD/securities? Who knows - the volumes and exposures are huge (just look at the volumes going through the daily fx markets) and very hard to get concrete figures on, the last time carry trades attempted to be unwound we had the LTCM fiasco (read this for an excellent history guide to the events in 98 and good primer on the bond/fx markets to boot), the Yen jumped 20% in a week and the fed had to intervene to prevent global financial meltdown. IMHO the fed now has much less leverage and the positions involved are an order of magnitude larger.

Carry trades are THE driver for all the asset bubbles we are seeing. As more participants have caught on they have grown exponentially. In a globalised environment, low interest rates to facilitate growth in a weak economy (aka Japan from 95) mainly allow hedge funds to borrow increasing amounts of cash to carry elsewhere (in the process artificially depressing the currency of the host). Hence (for example in the UK) the wall of money the banks in this country are trying to ram down the throats of consumers or invest in the FTSE (how high can it go??) to complete the last leg of the carry trade, they simply don't care if there are fairly high levels of bad debts because they borrow at 1.5% in a falling Yen and lend at 4.5% (mortgage) to 20% store/credit cards/overdraft in a rising GBP. Obviously as you unwind the trade GBP falls and YEN rises, hence the rush for the doors as liquidity vanishes.

[Michael]

''Stagflation'' was a term coined in the 70s to describe a slump in demand combined with rising prices.......

This happened in 73 as a result of the opec oil price rises.........

Previously inflation had only been associated with economic booms.....

My parents' 3 bed semi in ave town value 1969 4k........1972 9k...........1977 14k......1982 33k

1988 75k .......2006 215k...........