Monday, July 07, 2008

Back Over A Year Ago...

I wrote a post on May 18th 2007, about stagflation. Funny how no-one listened to me then, might they now?

Let me take you back to the 70's, to something called stagflation (High inflation, high unemployment). Around 1975/6, OPEC started controlling the supply of oil, raising the price of oil, the US auto industry was producing gas guzzling autos just when the Japanese were entering the market with fuel efficient vehicles. To make matters worse, the auto unions, asked for, and got COLA's (Cost of Living Allowances), meaning that if inflation went up by 4%, they wages would automatically go up by that amount, and then they could still negotiate an increase on top of that rate. We also had the NEP (National Energy Program) that restricted the price of gas, shutting down Alberta.

Flash to the present. High oil prices, inflation on the rise, unions striking, climate change costing Alberta billions, high dollar leading to unemployment in the manufacturing sector, starting to sound familiar?

Beware, stagflation is not something that the government can fix. If the government targets inflation by raising the interest rate, that slows the economy, but if manufacturing jobs are being lost already, that kills even more jobs, making unemployment worse. So, if the government fights unemployment by stimulating spending, it makes inflation worse.

What got me started looking for that post was this one by Unambiguously Ambidextrous.

It's not a sexy topic, but it is important, start thinking about what might happen to you, if the Bank of Canada raises the bank rate? Is your mortgage locked in? With rising oil, home heating, and food prices, not to mention property taxes, can you survive higher interest rates? Over a year ago, I saw the signs (and my office mate who happens to have her Masters in Economics also agreed) of stagnation. I still see them, and Dion's tax grab will act the same as the NEP did back then, it will kill jobs across Canada, not just in Alberta.

Scare mongering? You decide, but even the Globe and Mail has an article about it.

Remember, my post is from May 18th, 2007, hate to tell you I told you so, but I did, over a year ago. Will you listen now?

1 comment:

Anonymous said...

The Austrian economists have been predicting this for years and have been recommending oil, gold and other commodities as a way to protect yourself from the coming massive inflation. What most people see as rising prices is actually the effects of a deteriorating currency. As more money is created out of thin air it buys less.

See here for a chart on money supply rate increases.

Governments are now looking for scapegoats to blame when in reality it is their own looses monetary policies that cause this.

At this point the US is really between a rock and a hard place. They have to talk tough on inflation but they can't actually raise rates because the debt levels are so high that they risk tipping the US economy into a serious depression. The most likely outcome in the US over the next few years will be hyperinflation as the economy weakens and inflation soars. This will cause the long bond rates to soar even if the short term rates are held down by the FED.