“Stagflation,” A Term Not Found in the Keynesian Dictionary

September 30, 2011


This is not a term you will here coming out of a Keynesian. It does not exist and if it does, it couldn’t possibly have anything to do with printing money.

CNBC is running a “Master of the Market” series of interviews. Jeremy Siegel starts off his  interview this morning well enough. Siegel points to the road map as laid out by Rogoff and Reinhart’s research. The research describes the typical cycle throughout 800 years heading into and coming out of financial crises. The name of the book is “This time is different….” mocking that economists always claim that it’s different this time, and it never is.

So what does Siegel do? He says “this time is different” because we have the tools to prevent deflation. The printing press. Ah yes, printing money. That magical elixir that solves everyone’s problems. Actually, no it doesn’t. It causes even bigger problems.

He acts as if a poor economy and inflation are mutually exclusive. This is so errant and there are just so many examples of inflationary depressions, it boggles the mind that Siegel and those of his ilk have the gall to pull out this faulty logic. Even more baffling, no one calls him out on it.   The stagflationary 1970′s, thousands of years of history, and common sense debunk this myth. From Wikipedia :

Stagflation is a situation in which the inflation rate is high and the economic growth rate is low. It raises a dilemma for economic policy since actions designed to lower inflation may worsen economic growth and vice versa. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the phrase in his speech to Parliament in 1965.

The concept is notable because, in the version of Keynesian macroeconomic theory which was dominant between the end of WWII and the late-1970′s, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve. Stagflation is also notable because it has generally proven to be difficult and, in human terms as well as budget deficits, very costly to eradicate once it starts.

In the political arena one measure of stagflation termed the Misery Index (derived by the simple addition of the inflation rate to the unemployment rate) was used to swing presidential elections in the United States in 1976 and 1980.

The misery index, which measures unemployment – inflation hit an all time high recently. So what do the academic elitists with their models based on flawed premises want to do. Print more.

Why would you want prices moving up when the economy is weakening? That would be great wouldn’t it. People are losing their jobs while food, electricity, rent, health care, college education, and everything else under the moon is shooting up. Yes, that can, does, and will happen with enough printing.  Somehow, that’ll make us all rich in this fantasy world.  We might all be paper millionaires – in monopoly money. We just won’t be able to buy anything with it.

Email to CNBC :

@Jeremy Siegel. Inflation and depression are not mutually exclusive. You can have weak economies and inflation. It’s called stagflation.

Sovereign debt defaults and currency crashes is the next phase and we look to be on that path.  The European troubles should not surprise to anyone and neither should additional defaults. In the Great Depression, 40% of countries in Rogoff and Reinhart’s sample were in default at the peak.

It’s important to keep in mind that you can default traditionally, by not paying your bills, or by defaulting through high or perhaps hyperinflation by printing money and devaluing the currency.

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