Stagflation Threat

2 August 2004



US Economy Slows on Oil Price Increases

The latest figures on the growth of the US economy are worrisome. The Commerce Department announced that the second quarter GDP growth rate was a tolerable 3.0%, but that was off from the 4.5% in the first quarter, and it failed to meet the experts' expectations. Consumer spending dropped significantly, and this stemmed from rising oil prices. In the 1970s, this condition was dubbed stagflation.

Stagflation was the economic condition that destroyed the Carter Administration, the Callaghan government in the UK and most of the prospects of the west in the 1970s. It also led to the sado-monetarism of the Reagan White House and the Thatcher governments. Rising inflation coupled with no or little economic growth results in a decline in real terms in economic health. Moreover, it creates very angry voters.

As in the 1970s, the world is watching oil prices rise far beyond what consumers are psychologically ready to see. Five years ago, suggestions that gasoline in the US would cost more than $2 a gallon would have been laughed out of the room. Americans would riot in the streets and the president would be hanged in effigy. Instead, people are paying the price to fill up the SUV and aren't driving to the mall as often to spend as much. That drop in demand should lower prices, but because of the increase in shipping costs thanks to bad oil policy, prices rise anyway.

If allowed to run its course, as happened in the 1970s and 1980s, stagflation eventually goes away thanks to the inherent self-correcting nature of the market economy. In the meanwhile, millions of people lose trillions of dollars. In the current environment, the only solution is to begin replacing petroleum with other energy sources. Natural gas is the easy fix, but unfortunately, it comes largely from the same places oil does, so the political risk remains. Hydrogen is still too far off, and solar power has never been taken seriously. Nuclear energy creates poisons that last millions of years.

In short, either the oil prices come under control before stagflation really gets off the ground, or America and the rest of the energy guzzling part of the world begins to make some choices from among many unlovely options.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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