Tuesday, June 01, 2004

Just like an unreformed pessimist to rain on the parade. While many are hailing the last three quarters of economic growth in the United States and its apparent spillover effects in East Asia, some (such as Irwin Kellner at CBS MarketWatch) are impertinent enough to speak a foul word in the midst of all the revelry: "stagflation".
Don't look now, but just as inflation is speeding up, the economy is slowing down. Can you say stagflation?

After growing at a pretty good clip in the first quarter, the economy appears to be slowing down during the current period. Retail sales fell in April, pulled lower by motor vehicles. New home construction also declined, while most other data show slower rates of gain.

Ordinarily this would not be cause for alarm except for the fact that price increases are coming on thick and fast. The consumer price index is now almost 2.5 percent higher than it was a year ago; as recently as yearend, the 12-month change was a full point less.

You can blame some of this on the soaring cost of energy. Higher transportation costs are leading many firms to tack on a surcharge to the price they charge for their goods or services.

In other words - higher energy costs are spreading throughout the economy like a cancer. Not surprisingly inflation expectations are beginning to rise as well.

. . . Stagflation was the rule, rather than the exception in the 1970s, who's to say it can't happen again?
Stephen Roach has resolutely jumped on board the "abrupt downshift" train with his column today, eyeing three keys trends likely to drag the GDP down in early 2005:
First, a normalization of the Fed's monetary policy stance will test America's newfound asset-driven growth dynamic; not only will it challenge conditions in asset markets, themselves - especially property - but it will also pose a stern test to the wherewithal of the overly indebted US consumer.

Second, to the extent that the recent elevation in oil prices reflects greater pressures on the demand side rather than from the supply side of world energy markets (see our 28 May dispatch, �The Great Oil Debate�), little immediate relief can be expected as global growth remains surprisingly brisk. At $40, higher oil prices are a heavy tax on the world's energy consumers. At $50, the tax would probably turn into a shock. In either case, the outcome is a distinct negative for global growth, especially if it takes the form of a geopolitically-induced shock. In light of ongoing and mounting tensions in the Middle East, such a possibility can hardly be ruled out.

China's efforts to slow an overheated economy are a third counter-cyclical development in the offing; while the measures haven't had an impact yet, I continue to believe it's only a matter of time before there is a distinct slowdown in the pace of Chinese industrial activity. As these factors come into play, I have little doubt that the global growth cycle should turn decisively to the downside by early next year.
Good points all, bu what neither Kellner nor Roach allow into their analyses, however, is the important role of political economic power. There is a great article on stagflation in a 2001 issue of the journal Review of International Political Economy by Jonathan Nitzan of York University (Toronto) in which he identifies stagflation as one of four "regimes of differential accumulation". That is, stagflation is one strategy by which dominant oligopolistic capital achieves a higher-than-average profit rate. In Nitzan's words,
over the longer term, differential accumulation depends primarily on mergers and acquisitions. In the shorter term, it can benefit from sharp stagflationary crises. The main engine of differential accumulation is corporate amalgamation, which thrives on overall growth and the successive break-up of ownership 'envelopes'. Occasional discontinuities in the process, however, push dominant capital toward an alternative regime of stagflationary redistribution. The result is a pendulum-like oscillation between long periods of relative political-economic stability accompanied by economic growth and low inflation, and shorter periods of heightened conflict, stagnation, and inflation.
There has been some chatter about a revival of the merger boom of the 1990s, but we have in fact seen very little of this form of differential accumulation. With vigorous global growth resuming and global demand for natural resources in particular very robust, there seems little impediment to a bubble-like spurt in global productive capacity. If dominant capital cannot gobble up this capacity toward the end of limiting it (and bidding up profits), and it desperately wants to head off the corrosive effects of a price war (particularly on the cusp of the deflation scare of 2002-03), the alternative is a short vigilant cut in production and price hikes as a means toward redistribution through a short severe bout of stagflation.

The fly in Nitzan's ointment is the limited ability of capital in a globalized economy to orchestrate a coordinated stagflation crisis. Within a national context things are much easier; at the global scale they may be impossible (for now). That being said, one should keep ones eyes not only on Roach's "three key trends" but add a fourth to the mix: global M&A activity.


At 1:33 PM, Blogger geopoliticus said...

Thanks for the Nitzan link. Do you have others like this?

At 3:21 PM, Blogger Gen. Glut said...

Nitzan has another good article on the subject in RIPE in 1998.


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