Describing the current global economic situation, experts are increasingly using the term "Stagflation". And although they immediately correct that there is no talk of a real crisis yet and the downward movement can be called moderate, some characteristic signs can really be noticed. What it is and what threatens the world, the country and each individual citizen, it is worth understanding in order to better navigate and focus less on speculation.
Origin and components of the concept
The term “Stagflation” is a derivative of two economic concepts “Stagnation” and “Inflation”. The first refers to the depressed state of the economy, the fall in GDP and rising unemployment, the second - the rise in prices. As a rule, these two processes are mutually exclusive. Decreased incomes of the population, forced unemployment and a decline in purchasing power are forcing producers and sellers to moderate their appetites and reduce prices as well. That is why deflation (the opposite of inflation) is considered not the best signal about the state of the economy. This is a harbinger or a consequence of stagnation, that is, economic depression.
The growth of purchasing power (an increase in the money supply in the hands of citizens, loans willingly issued due to the availability of collateral, stable payments, confidence in financial stability in the future) inevitably leads to a partial depreciation of money - at a certain stage, production does not have time to satisfy the demand of those who have and citizens willing to spend. A shortage begins, and already it leads to an increase in prices, that is, inflation.
Stagflation is an economic incident in which downward economic development is combined with rising prices. What was previously considered impossible.
The danger of such a process lies in the difficulty of getting out of it. Back in 1938, one of the developers of the theory of stagflation, Alvin Hansen, stated that when such conditions are formed, the United States can plunge into the abyss of crisis for a whole century - the lack of money supply and the desire to hold it will reduce investment so much that the economy will simply have nothing to bring out of the crisis . A chain reaction can put all sectors without exception. Alvin Hansen's predictions at that time did not come true, but the calculations are still used.
The term stagflation itself was first mentioned in response to the situation in the country at a parliamentary meeting in 1965. That is why Ian Norman McLeod is considered the author. Periods that can be confidently called stagflation were experienced by almost all major economies.
Historical examples of the economic process
The situation of stagflation does not fit into the basic economic theory, therefore, it is most clearly seen in practical examples. If we consider that stagflation is, in simple terms, rising prices against the backdrop of a decline in production, it is not difficult to find those. A classic example is America in the early 70s. The rejection of the gold standard by Nixon with parallel control of the price level caused a shock stop in many internal processes. The fall in domestic demand, in a chain reaction slowing down the domestic production of food and essentials, to reduce GDP. The fuel crisis that erupted in 1973 (caused by OPEC's decision to cut production) shot up prices, first for fuel, and then for all related resources. The savior of the economy in this case was Paul Volcker, who raised the key rate to a record, at that time, 20%. This interested investors, with whose funds it was possible to raise the economy.
A little earlier, the UK experienced a period of stagflation. The Suez crisis led to an increase in prices, they provoked riots and workers' strikes. The shutdown of production only exacerbated the problem - personnel changes began, new hasty decisions, an increase in inflation to 25%. By 1970, the country, in which a third of the population was on strike, had completely lost confidence in the national currency. At the same time, understanding full in government circles, investors left the country. The situation was saved by the IMF, which the British government was forced to turn to. The £2,3bn tranche (over £12bn in 2022) has moved the economy off the ground. The role of a strong leader should not be underestimated either - Margaret Thatcher began the fight against trade unions, which, under conditions that were impossible to fulfill in a crisis, hampered production.
A close example in Russia is the 90s and hyperinflation, which forced additional zeros to be drawn on banknotes. Rising prices against the backdrop of rising unemployment and the depreciating ruble have led the country into an economic abyss. But economists are in no hurry to call this situation stagflation. Stagflation is, in simple words, a slow slide into the abyss, and with the collapse of the USSR, the fall was instantaneous. Nobel laureate Milton Friedman proposed his own term - "Slumpflation", taking as a basis the word "slump", that is, a sharp fall.
Signs of stagflation
The proposed economic models make it possible to single out the main features of stagflation. They are:
- rising import prices as an indicator of the depreciation of the national currency;
- reduction in private investment even in potentially promising companies;
- an increase in the percentage of business and citizens' debt load, an increase in the share of non-performing loans;
- an increase in unemployment due to the inability of enterprises to maintain the current level of production or a forced decrease in turnover;
- a general decrease in the income of the population and the mass of money in circulation, interest in goods of a lower price category.
All these processes are quite smooth and can occur within 3-5 years, gradually aggravating the situation. In some cases, the collapse can be even more abrupt - a reaction to a specific event or their complex.
Table "causes of stagflation"
Supply shock - a sharp change in the balance between supply and demand, an oversupply or shortage, causing a change in value.
Ineffective economic policy
The explosive growth in energy prices like an avalanche provokes an increase in the cost of all goods and services, production costs increase, which reduces the profitability of production.
An increase in the money supply due to uncontrolled injections and simultaneous pressure on business (taxes, excessive control). Decreasing GDP on the back of growing demand from wealthy clients.
The complexity of the definition is the fact that each of these signs separately can be a sign of a completely opposite process. Only the sum of signs allows us to say that this is economic stagflation.
The main causes and prerequisites for stagflation
The proposed examples allow us to derive the main causes and phases of stagflation. Two main blocks follow from the concept itself.
There are also several additional prerequisites that can even become triggers:
- Increase in the cost of basic goods. Prices can be raised by monopolists, taking advantage of the lack of competition and guided only by the desire to make money. The reasons may also be objective - the tax rate, the increase in prices for raw materials and resources, the increase in the credit burden and the need to pay off previously taken obligations.
- Rising prices for raw materials for reasons other than speculative. So military conflicts, major natural disasters, the need to work out new logistics schemes can intervene. The chain can be multi-level - lack of fertilizer causes a shortage of grain, dairy products and meat grow, the entire food basket becomes more expensive.
- Depreciation of money due to an increase in the money supply in circulation. Wanting to support the population or reduce the level of unrest, the government distributes money as support measures. The imbalance between supply and demand (there is money, but no goods) again causes prices to rise. Money is depreciating again and ordinary citizens are dissatisfied with the decline in living standards.
The chain of events leading to the global economic crisis looks simple and capacious. High prices stop buyers. Manufacturers are forced to slow down, lay off workers. Unemployment reduces purchasing power, again forcing businesses to produce less.
The state, which also falls into a vicious circle, can become an additional link. Trying to find money for social projects and reassure citizens, the government begins to put pressure on enterprises. Due to losses, entrepreneurs reduce turnover or even close production. Unemployment is on the rise.
Global and private ways to fight stagflation
It is the vicious circle effect that is the main problem of stagflation. For a sharp reversal, the same serious and comprehensive measures are needed. Popular, although not yet tested in practice, ideas:
- Active investment and comprehensive support for investors. Public investment, combined with tax breaks for those willing to invest, should jumpstart the economy.
- Slow recovery from the crisis at the expense of business at all levels, which does not imply the expenditure of reserve state funds, structural transformations.
- Tax cuts, state control over vital goods and key areas of production, antitrust laws. It is possible to borrow funds from international communities to launch hub production.
- The shock method is a targeted emission to stabilize the corporate sector. The authors believe that an increase in inflation will be less of a problem, and a soft credit policy will start production.
All analysts agree that it is too early to call the situation in the world stagflation, although indeed there are already signs of it (problems with energy resources, a decrease in the turnover of enterprises, medium-sized enterprises going bankrupt and closing). The downward movement may continue for another 3-5 years, and it will depend on the actions during this time how much the global economy will suffer in the end and how many years it will take to reach previous levels.