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In economics, stagflation has been defined as a state
or period of a slow moving or moribund economy coupled with high
unemployment and rising prices.
They say that the term, which
combined stagnation and inflation, was first used by a former
British politician and minister, Iain Norman Macleod in a 1965
speech to the parliament. But stagflation, they say, was only
acknowledged as a serious macroeconomic condition in the seventies
after it had stricken many countries. Before that time, the
generally accepted Keynesian economic theories of twentieth century
British economist, John Maynard Keynes, assumed that inflation and
stagnation are not likely to occur at the same time.
In economics, inflation pertains
to the general and progressive increase in prices of goods and
services. Inflation is like the cholesterol resident in the human
body; it can either be good or bad.
Economists would say that mild or
manageable levels of inflation have beneficial effects because it
stimulates economic growth or keep the economy active. In the
short-term, it encourages people to spend more now in anticipation
of higher prices in the future. Borrowing money is more likely
because there are less incentives to save. Expected inflation could
drive the conversion of savings to take the form of investments than
to see the purchasing power of these savings depreciates with
inflation.
Inflation is often associated by
experts with the excessive money supply circulating in the economy.
And the tasks of handling, controlling and regulating this scenario
fall on the lap of governments through central banking and its
monetary policies. Thus, it is almost predictable for government to
increase interest rates during periods of inflation to moderate
money supply.
But unpredictable and high
inflation rates are like bad cholesterols that could lead to a
cardiac arrest of the economy. The uncertainty discourages people to
invest and save. Predictably, workers would demand for higher wages
to cope up with the rising prices of goods and services, which in
turn lead to higher inflation. The currency may then lose its value
and the normal workings of the economy is eventually jeopardized.
Having a declining economy, high
unemployment and unmanageable inflation all at the same time in a
scenario called stagflation is surely unfortunate.
Many analysts say that the global
stagflation in the seventies could be attributed in part to the
inflation brought about by the abrupt increase in the price of crude
oil. For those old enough to remember, the Organization of Petroleum
Exporting Countries (OPEC) met in Tehran in 1973 and doubled the
price of oil from US$5.50 to US$11.00 a barrel because, among other
reasons, of the desire of the then Shah of Iran for more foreign
exchange to acquire more military hardware.
Increases in crude oil prices
this year are unprecedented. In
December 2006, per barrel price is about US$63. By October 2007, the
price rose to above US$90. In January of this year, it reached the
US$100 dollar mark, and last May 21, the price breached the US$130
level only after almost five months. Several days after, the price
even went up to more than US$135. Unfortunately, there are forecasts
that the price could be as high as US$200 per barrel by the end of
2009. Perhaps, it could be more.
It appears that what drives the
escalating prices of oil in the world market to unreasonable
proportion is not so much about the economic rationale of supply and
demand, although it is often used as the justification.
Political conflicts and greedy speculations are.
While most people of the world
would have to brace for higher prices, growing unemployment,
economic collapse, and even poverty and hopelessness, a few others
would reap the bounty in due course. For obvious reasons, there is
nothing much heard of OPEC, an organization which is expected to
ensure the stabilization of international oil market prices, even if
this issue is the global talk of the town these days. Regrettably,
even if the global oil situation improves and normalizes, it is next
to impossible to expect that these prices would ever go down below
the US$100 level. The more reasonable expectation is for the price
to simply stabilize.
Meanwhile and unless oil prices
remain stable, many countries in the world are in danger of
stagflation. God forbids what would happen after that.
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