Finance, Financial Markets

Is The Economy Leading to Stagflation?

Stagflation is an exceptional event. It is a combination of 3 main aspects:

  1. Stagnant economic growth=lack of growth in consumer demand and business activity, and lower future growth estimates.
  2. Rising prices=higher inflation.
  3. High unemployment.

This combination creates slow economic growth or recession.

 

Another way to describe stagflation can be the simultaneous combination of a declining GDP (gross domestic product), rising prices (inflation), and high unemployment rates.

 

 

Why is Stagflation Unique and Rare Event? 

  • On the one hand, when there is positive economic growth (GDP) and a low unemployment rate, the effect is higher inflation. Therefore, when there is a decline in economic growth (GDP) and a high unemployment rate, the effect is lower inflation.
  • On the other hand, stagflation is a unique situation because inflation should never happen in an economy that is not strong. In a healthy market economy, the slow growth of the economy prevents inflation from occurring. Hence, consumer demand falls enough to keep prices from going higher. So this event called stagflation occurs when government policies interfere and change the normal market functioning.

 

Another way to describe stagflation can be the simultaneous combination of a declining GDP (gross domestic product), rising prices (inflation), and high unemployment rates.

 

stagflation, financial markets, finance, monetary policy, financeandstoicism

 

Stagflation occurs when government policies interfere and change the normal market functioning.

 

What Causes Stagflation?

The main explanation of the occurrence of stagflation is ‘poor monetary policy.’

The term Stagflation happens when Central Banks print off too much money, or the leading Central Bank’s policy is ‘credit expansion,’ at the same time they constrain supply. These events create an environment of slow growth or negative growth, which prevents institutions and companies from having productivity and producing more.

The combination of all these previous events creates an explosive mix of conflicting expansionary and contractionary policies, which creates a slow or negative growth while producing inflation. This combination is the definition of stagflation.

 

 

Which One Was The First Stagflation Period?

It was during the 1970s where most experts considered to be the first stagflation in the history of developed economies. The result was a reality of high inflation, stagnation of economic, and a high unemployment rate; back by then, the leading cause that created the situation was an oil shock.

The main explanation of the occurrence of stagflation is ‘poor monetary policy’.

 

 

Is There a Big Risk of Stagflation?

The world is living a period of enormous uncertainty and weak future growth estimates because of the economic lockdown of Covid-19 and because of the oil crisis too.

In this scenario:

-There has been a shutdown of major economies.

-Central Banks keep pumping liquidity to the market.

-Central Banks keep lowering interest rates to ‘mask the current reality and risks.’

-Poor economic development and reduced industrial activity that seems to come down.

All of the previous facts are happening while there is:

-Uncorrelated relationship between the stock market and the real economy.

-Higher inflation in nonreplicable goods and asset prices.

stagflation, economy, financeandstoicism, coronavirus

 

 

Conclusion

The future risk of stagflation in most developed countries is significant, and central banks and authorities shouldn’t ignore it. 

If strong stagflation finally happens, it will dramatically change all aspects of the economy:

-Hiring decisions.

-Investment Decisions & Investments allocation.

-Global economic growth.

-Real Estate and commodities valuations.

-Interest rates policies.

-Fiscal programs and spending programs.

 

Policies focused on solving demand problems in the middle of supply shock don’t have any positive effect because of any consequences from changing, and boosting the demand will never have the same impact on the supply side as long as there is a lockdown in the real economy.

What happens when central banks intend to “artificially” boost credit and demand, in the middle of a supply crisis, the real potential risk is the generation of a massive deflationary scroll driven by a tremendous amount of debt that can be followed by stagflation when the global supply chains start to become rigid enough.

 

The future risk of stagflation in most developed countries is significant and it shouldn’t be ignored by central banks and authorities. 

 

If you still didn’t get the chance to read my previous article, be free to read it in the next link: 5 Budgeting Tips In Times of Coronavirus Crisis.

 

Don’t hesitate to reach out to finance.stoicism@gmail.com

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