What Causes Stagflation?

Question

I am still pondering the US economy. John Maynard Keynes is supposed to have said stagflation (i.e., stagnant economic growth, along with high unemployment and high inflation) was impossible.

But I do remember 1973-75, you could go into the grocery and see a pile of price stickers pasted on top of each other on canned goods, cans just sitting there increasing in cost. There was an oil crisis going on, the Mideast oil cartel was raising prices relentlessly, and President Nixon imposed wage/price controls in response to (huge) 4% inflation.

Some websites say they just don't know the causes of stagflation, others give it a shot with ideas like "Stagflation occurs when the government or central banks expand the money supply at the same time they constrain supply." (??? Really ???) Or, "when conflicting expansionary and contractionary policies occur, it can slow growth while creating inflation. That's stagflation."

I have been thinking about stagflation because, as I recall, that pokey 1970's economy is how President Reagan got through his "trickle-down" theories, which (may have) eventually resulted in that Great Recession collapse of 2008. (Reagan's pro-business policies were greatly expanded by President Clinton, this was a bipartisan effort.)

So here is one website I found, do you understand about stagflation? How does it relate to an economic system, and is it a deal-breaker for capitalism? (That is actually what I wish I could figure out.)

 https://www.thebalance.com/what-is-stagflation-3305964

Answer 1

"Stagflation occurs when the government or central banks expand the money supply at the same time they constrain supply." (??? Really ???)

I think that article is talking about two different kinds of supply.  The first is the money supply (raised by printing money), the second is the supply of goods (constrained by raising taxes, especially on the suppliers of the goods).

I think Milton Friedman is generally given credit for figuring out what was wrong in the 70s.
http://www.investopedia.com/articles/economics/08/1970-stagflation.asp

Economics is called the 'dismal science' for good reason.  I think what happens is that when too many people begin to understand the rules of economics, the rules change.

And no, I don't really understand economics, and I suspect most of our leaders don't either.

Comments

O'Tink I had a comment for you here...I was having some trouble with Internet and it seems to have gotten lost...

Basically, it was more economy stuff...I had gone back to 2008, and the fact that a few S&L's did just fine during the Great Recession. They had close to a zero default rate on home loans during those years; and it was because they qualified mortgagees carefully, then they held all their loans in-house, no derivates. Also, they offered classes on how to budget. 

In other words, they operated responsibly and ethically, even though they were NOT legally required to. Here is my concern, and I hope Marianne sees this also...what if the economic system does not really matter, whether communism, socialism, capitalism (not strict parallels I realize), worker/owner co-ops...could it be that a few greedy unscrupulous people will ALWAYS find a way to commandeer power eventually, and game the system? The most vulnerable (as the Iowa oldsters) getting plundered first, but everyone eventually becomes a target...

Bottom line, how hopeful do you feel? Here is a quote I came upon from Emmanuel Kant..."If justice perishes, human life on Earth has lost its meaning." 

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Yes, you make a good point, Virginia, there will always be those who game whatever system is in place for their own advantage.

But... I think some systems are FAR more subject to cruel injustices than others, dictatorships in particular.

I think the best we have been able to come up so far with is free-enterprise democracy, with enough government oversight to prevent abuses.  I realize that it doesn't prevent ALL abuses by any means, but I think it was Churchill who said Western democracy is the worst of systems, except for all the others.

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You likely already realize, O'Tink...that is what I am wondering, a free-enterprise corporate democracy might be "worst of systems, except for all the others...oh, Winston Churchill is SO dear...truly a wit, a wordsmith...his sage advice I still remember, "When you are going through hell, keep on going."

I am still going to keep looking, because if capitalism inevitably ends up with what I saw...well it's appalling, horrific...plundering the aged, where they are most defenseless...I feel I must consider also that may be one symptom of a dying, failed system.

I have been thinking of the worker/owner cooperatives; they are of course more democratic, however there again you must balance the inefficiency. Even though politically, a dictatorship is the most efficient form of government, but we certainly don't want all our eggs in THAT basket...likewise maybe these worker/owner arrangements, even though more democratic they are almost certainly, inherently less efficient, but maybe they will have their place and bring something wholesome...

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My Dad once said, "What we need is a benevolent dictatorship, with a dictator who always does the right and just thing."

I said, "Well, Dad, it sounds like you want God to take over."

He laughed.

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...sounds to me that O'Tink and honorable Father have some interesting conversations, over the years! 

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Yep, and much laughter.

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 (For the O'Tink Family Paternal Parentage...)

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Answer 2

Thank you for the link, Virginia.

That confirms, more or less, quite a few general views, assumptions and studies:

https://en.wikipedia.org/wiki/Stagflation

https://en.wikipedia.org/wiki/History_of_the_United_States_(1964%E2%80%9380)#.22Stagflation.22

https://uneasymoney.com/2012/06/18/1970s-stagflation/

https://en.wikipedia.org/wiki/1973%E2%80%9375_recession

About the feelings of the "forgotten Americans" in the 60ies:

http://web.mit.edu/21h.102/www/Primary%20source%20collections/Age%20of%20Limits/Schrag,%20Forgotten_American.htm

Comments

Marianne, your links are intriguing...and I was smiling, because of all the contradictions among them! Stagflation seems truly not well understood. One link says the term originated in Great Britain 1965, the first documented episode of stagflation; another says it was the US in the 1970's, and still another suggests the US experience in the 1970's was not really stagflation at all!

One of your Wikipedia links gave two causes, and both kinda fit with what I recall of those years 1973-75...somewhere in there, the Middle East oil cartel had severely limited supplies, with a huge price increases in our oil-dependent economy.

I was especially interested in the "Forgotten American" link...that is my experience, as I identify most with the lower middle class into which I was born. Those people have endured unbelievable hardship, at least my parents' generation did, but since they are non-minorities they don't get any acknowledgement. So I have never been surprised they are resentful...what I do believe, however is that their resentment is misplaced, misdirected...I don't think they have correctly identified the source of the problems...what do you think?

***Marianne, if I may ask...will you also kindly take a look at the comment I left for O'Tink?

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Yes, Virginia, opinions and theories are contradictory and often confusing.

And that is why so many different groups feel left aside.

I did indeed read your answer to T(h)ink, and you are describing the situation perfectly:

"In other words, they operated responsibly and ethically, even though they were NOT legally required to. Here is my concern, and I hope Marianne sees this also...what if the economic system does not really matter, whether communism, socialism, capitalism (not strict parallels I realize), worker/owner co-ops...could it be that a few greedy unscrupulous people will ALWAYS find a way to commandeer power eventually, and game the system? The most vulnerable (as the Iowa oldsters) getting plundered first, but everyone eventually becomes a target..."

Bottom line, how hopeful do you feel? Here is a quote I came upon from Emmanuel Kant..."If justice perishes, human life on Earth has lost its meaning."

Read more: http://www.ihavesolved.com/36733/what-causes-stagflation#ixzz4lgkLHb9N

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Oh...all this is a BIG disillusionment for me Marianne...I DID think our country operated more responsibly than seems to be actually the case...

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Yes, Virginia, here in Europe, quite a few things went wrong, and much of the old historical tragedies and events left deep scars.

I suppose that we are a bit more sceptical.

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  Marianne... trying to recall for certain...in World War II, Switzerland was never actually a battleground, is that true? Historically Switzerland maintains neutrality, even when the cost of that neutrality is very high?

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Unfortunately, Virginia, it was not so peaceful; there were incidents and bombings - and yes, the cost of neutrality is often high, as much of it is not seen from outside:

http://history-switzerland.geschichte-schweiz.ch/economic-dependence-rationing.html

https://en.wikipedia.org/wiki/Bombings_of_Switzerland_in_World_War_II

https://en.wikipedia.org/wiki/Switzerland_during_the_World_Wars

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Oh, I DO see now more about the situation of Switzerland...all that was very difficult Marianne...for the first time, I appreciated the fact that in WWII, Switzerland was surrounded by Axis regimes, including occupied France. And that Swiss air space, including bombings, was violated many times by both sides.

Also, I learned that the assassination of a Nazi official in Switzerland, by an expatriate Jew, was one of two assassinations used to justify the Kristallnacht pogrom of 1938. The second assassination carried out by a Jewish man named Grynszpan, from which I realize that Greenspan is the Americanized version. I looked for the derivation or meaning of that name, but could find nothing.

* * *

Do you recognize the surname Kuttle? When I was a child, almost everyone was no more than second generation immigrant from the Old Country...and the Kuttle family was Swiss. Each Christmas Eve, they played beautiful bells that rang throughout the whole hamlet, then the lovely yodeling. When I was born in 1944, we were the third generation cohort...my family being mostly Swedish, British, and French Huguenot...my father said our family was Heinz 57 varieties! 

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Yes, I think that this is the American version of Küttel (it is not a kettle), and there are also well known names, like Kübler and Zurbriggen:

https://en.wikipedia.org/wiki/Ferdinand_K%C3%BCbler

https://en.wikipedia.org/wiki/Pirmin_Zurbriggen

As to most used names (also by our neighbours), check:

http://lenews.ch/2016/03/29/whats-in-a-name-most-common-swiss-names-and-their-meaning/

https://flugzentrale.de/en/1905/blog/swiss-surnames

and

(Cuche, Rosset, Amez-Droz, Regazzoni, Cancellara, etc. are also common with our neighbours.)

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Marianne, this tugs at my heart a bit...because I grew up with people who looked like this! 

...the Nordic features of Kübler and Pirmin Zurbriggen...such men were known as strong, hard-working loggers...they came for the work in the great forests here...also their athletic ability...they were wonderful husbands and fathers. Now our communities are much different, but these photos make me remember all over again!

  

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Lol - yes, Virginia, they were very special, and there were quite a few more, like, for instance, Lise-Marie Morerod

https://en.wikipedia.org/wiki/Lise-Marie_Morerod

And you have your special champions too. 

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Marianne you have just reminded me of a sports figure I admire...his name was Bobby Moch, and he was coxswain of the USA rowing team that won a gold medal at the 1936 Olympics in Nazi Germany. He actually graduated from the same high school I did, the little town in Washington State. 

I even knew his father, the jeweler in that small town. If the name Gaston Moch sounds Swiss to you, well it is! The family was Swiss Jewish, emigrating to the USA before WWI, I believe. Just now, I read that Gaston Moch did not even tell his son they were Jewish until the team was about to leave for Germany in 1936...thought the boy should be aware of that, I suppose...

The second photo is of Bobby when he was older, wearing his medal...he died in 2005, age 90.

  

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Virginia, the name Moch seems to have an Eastern German or a Slavic origin - they also refer to an old Gaelic name.

But your info is quite interesting.

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Yes Marianne I agree, it is interesting...tracing the routes by which we have all ended up where we are...I have not spent much time on my own family genealogy, preferring to look forward, but in our conversations here on Solved I have thought much about the diverse people of my childhood...

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Oh, Virginia, I did neither research much into my family's genealogy, as time was constantly too short, probably like for you. Yes, I am also trying to remember the people I knew or admired from far in my childhood - lol.

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Old age seems to be a very special time of life, Marianne...drawing together the memories, the experiences of a full life into peace and wisdom...with ever more to know and understand...

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Yes, Virginia, it is.