A world in economic crisis

More signs of a move towards stagflation – 1970s redux

Posted in Cap and Tax by Aussie on May 18, 2011

Whilst several European nations have been on the verge of financial collapse, the USA has hit a $14trillion debt ceiling, the chief of the IMF has been arrested on suspicion of raping a young West African woman in the Sofitel hotel, Greece is about to default on its loans (and the lazy Greeks have continued their riots), there is now further evidence that the world is heading towards a period of stagflation, just like in the 1970s.

I started this blog as a means of examining the present in light of the past, which in this case is attempting to examine and re-evaluate the period of the 1970s, which is the period in which stagflation was first recognized. The factors associated with stagflation are: high interest rates, high inflation, and high unemployment. Whilst some people talk about the impact of the first oil shock on the rate of inflation at the time, there is very little analysis of the government policies that were put in place during that era.

I am been looking at the Australian experience because I am more familiar with what took place at the time. It would have been around 1973 when I first heard about stagflation during my economics course at Melbourne University. I do in fact remember the subject being introduced in the last semester. For this reason, I have tried to compare the possible factors that were similar between that period and what is happening in the current period. This is because there has been an eerie similarity between these two periods in time. My theory is that socialist government policies do in fact create the conditions that are ripe for stagflation to become apparent and set in. In articulating this theory, I am looking the impact of government insisting on following the green agenda, which includes higher taxation as well as higher utility bills for water, electricity and other utilities.

My memory of the situation in the 1970s was that the stagflation grew out of wage-price inflation. As prices went up, the unions demanded more and more wage increases. In those days, one of the heavy costs to the economy was the days lost due to strikes, especially due to strikes in the power industry. At this particular time I remember being taught that due to the oligopoly that is the oil industry there was little that could be done to influence the consumption of oil in a population. I was taught that there was an inelastic supply and demand for oil. This inelasticity usually meant that government could tax consumption at the pump with little impact.

In some respects, the oil shocks of the 1970s also turned this kind of theory on its head for a time. This is because when the price of petrol was driven higher, there was an increase in the purchase of more fuel efficient cars. However, by the 1990s, there was also a reverse of that particular trend, and we were once more driving cars that were less fuel efficient. Since then however, we have seen a rise in the Climate Change agenda (which is nothing more than a ponzi scheme) and we are yet to feel the full impact of measures that are being introduced by government in an effort to influence the kind of vehicles that we drive. 

These measures go beyond influencing our habits at the petrol pump because they also include are requirements to heat our homes, have showers, cook our food and light our homes. These are the rising costs that are now fueling the rise in inflation that is becoming more and more apparent.  Such measures have been introduced in order to force a change away from coal power stations to the more expensive and less efficient wind turbines.

Whilst I have believed for at least the past 12 months that the world is heading towards another period of stagflation, the real evidence that this is the case is only now beginning to emerge. This is because of the lag times associated with the collection of economic data that measures the impact of government policies that have been put in place.

The direction that I will be taking in the future will be to continue to look at those policies and how those policies are impacting upon inflationary trends in countries such as the UK, USA and Australia.  One particular policy, which will absolutely no influence on weather trends is that of Cap and Tax (crap’n’tax), the effort to put in place an ETS and to introduce a carbon price which will seriously impact the household budget.



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