A report on NPR's "Marketplace" that aired on last Tuesday cites a "senior economist" who states, "More and more people are starting to say, well, do we have a stagflation problem? We're certainly closer than we have been in a long time."
The problem: an economic slowdown, probably induced by the housing bust and the crisis in the financial industry, combined with historically high commodity prices and above all the high price of oil. A.K.A., "stagflation."
What is to be done? The politicians and the Fed alike agree that we are going to have to print money and "stimulate" the economy to avoid the worst effects of a likely recession. However, the problem with "stagflation" is that a solution for one half of the problem exacerbates the other half of the problem - in this case, by trying to pump up the economy, you risk further exacerbating the price of commodities and further sinking the dollar, even potentially setting the table for a more severe recession at a future point in time.
What's interesting is that there seems to be no debate whatsoever whether the better course is to promote economic stimulus and live with the resulting inflation, or to accept economic slowing and retard the declining value of money. There is really no debate - all parties agree, from the Dems to the Reps, from Bush to Bernanke, that the only possible route is to stimulate the economy and avoid what used to be regarded as "the natural cycle" of the economy. Everyone loves a free market except when they don't.
This current assumed solution is in stark contrast with the Fed's policy in the 1970s, when Fed Chairman Paul Volker fiercely fought inflation, even raising the interest rates to astronomic levels that are today almost unimaginable - as high as 20% in early 1980.
Why is it now a point unworthy of debate whether we should be more dedicated to fighting inflation or recession? I'm not an economist, but one suspicion I have is that something fundamental happened in this nation during the past 25 years - that we moved from being a solvent to a debtor nation, both collectively and individually. As this chart attests (previously posted here), in the very years that the Fed was raising rates to all time highs, our national savings rate was around a whopping 12%.
Since that time we have witnessed a steady decline of our personal savings, to the point now that we have a negative savings rate. Our profligacy is manifested both in our individual indebtedness through credit cards and other debts, as it is in our massive national debt to nations that fundamentally now own us - China and oil exporting nations in the Middle East in particular. It's their dollars, and no longer our own, that we are now proposing to effectively devalue to prevent us from feeling a modicum of the economic pain that we experienced in the late 1970s. And, since so few of us have any actual wealth that's not either theoretically found in our houses or that appears on our quarterly retirement statements from one investment firm or another, very few of us have any incentive to argue against the continued inflation of our "wealth." Debtors love inflation, since you get to pay for yesterday's loan with today's cheaper dollars. You prefer to fight inflation when you have something of value to preserve; you prefer to fight recession when "growth" is the only thing of value that's left - i.e., something you don't actually have. The fact that every major agent of our society agrees that "stimulus" is what is needed is a remarkable concession that we're broke. It's only a matter of time before our lenders stop financing our shenanigans - and I'm not talking about our banks, which are cookie-jar raiders numero uno.
The irony here is that our decision to fight inflation during our first encounter with stagflation was directed at a temporary and artificially induced condition of resource scarcity due to an oil embargo in the Middle East. Our willingness now to promote rampant inflation comes at a quite different moment, a time when the evidence grows daily that the world's resources are being strained by worldwide demand and that there is little spare capacity amid our insatiable appetite for non-renewable materials. While we might have erred on the side of combating inflation in the 1970s despite the knowledge that there were sufficient resources to bring down prices eventually, we are now proposing to stoke inflation at a time when we are facing the real prospect of worldwide resource depletion. If our policy then was for the benefit of the many Americans who saved, our proposed path now is for the benefit of a profligate and self-indulgent nation that is unwilling to begin to face the hard reality that we must do with less. Rather than allowing the "free market" to send us the signals that might cause us to heed this sovereign demand - as painful as those "signals" would doubtless be - we are collectively determined to wring the last drops of wine from the tablecloth, to scrounge in the ashtray for the last cigarette butt, to suck on a whitened bone for a bit of marrow, before we are forced to acknowledge that the party's over. By that time, the hangover will be immense - but we're too drunk to care at this point.
Still, it will be an unpleasant morning when we wake up and find there's nothing left in the pantry.