Stagflation Has Returned to America

It’s time to get out the polyester three-piece suit and the disco records because it’s the 1970s again. Oil has more than tripled in price since Mr. Bush became president, and the result is a stagnant economy and rising prices. The situation is “stagflation,” and it has returned to America, on a sort of a 30th anniversary tour.

Yesterday, the Labor Department announced that the producer price index in the US was up 1.8% in June, against expectations of 1.2%. Annualized, the actual rate reported is 9.2%, the highest since 1981, during the last bout of stagflation. Core inflation, which strips out food and energy prices because they are so volatile regardless of economic climate, was 0.2%, slightly below market expectations of 0.3%. That’s good news, if one doesn’t need food or energy.

Meanwhile, the Commerce Department reported that retail sales were up just 0.1% in June, below even the gloomiest of predictions. Auto dealerships seem to have suffered most, with sales falling 3.3%. Of course, the one area were retail sales were up was at the gas station. Sales there were up 4.6%, despite America buying and using less gas in June.

At the same time, General Motors’ CEO Rick Wagoner said his company had to “take some very tough actions to ensure our survival and success.” GM needs to change not to get bigger and richer but merely to ensure its “survival.” The plan includes selling off $4-7 billion in assets, cutting salary costs by 20% and eliminating health care coverage for U.S. salaried retirees older than 65, effective January 1, 2009. His goal is to increase GM’s liquidity by $15 billion.

Historically, the 1970s cure for stagflation required double-digit interest rates and a heck of a lot of patience. Indeed, stagflation lasted into the Reagan years. What makes this bout particularly worrisome is the falling value of American homes. Falling housing prices should be deflationary, and yet, prices overall continue to rise. The result is an impoverishment of the average American. Vice President Dick Cheney once famously remarked, “Reagan proved that deficits don’t matter.” However, the federal budget deficit and the US trade deficit have resulted in a weakened dollar that has sparked this whole mess. Actually, fiscal conservatives are right; a nation has to pay its bills over the long term, or else.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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