Alvaro Vargas Llosa
Washington Post Writers Group
Stagflation will likely come back into our daily lexicon. The political effect of the previous stagflation was the Reagan-Thatcher movement in the 1980s. The effect this time promises to be equally momentous. Let us hope it is peaceful, legal and reasonable. The danger that it will take a messianic, populist and authoritarian form cannot be discarded, given the signs we are already seeing at the ballot box in some European countries where anti-immigration far rights have polled strongly.
We are entering an era of high inflation, to judge by the massive growth of the money supply in the United States, Europe and Asia, and the stubbornness of central bankers who insist that high unemployment demands the creation of even more money. The last time the world went through a similar period was the 1970s. The term that defined the era was “stagflation.” Pull quote
In a nutshell, stagflation back then was the result of a recession partly caused by stratospheric oil prices followed by the decision to print tons of money in the hope of inflating the economy out of unemployment. In other words, stagnation was not so much because of oil prices; rather, it was the result of the monetary response to the stagnant environment that the high energy costs had helped create. Inflation simply added a new ill to an already grave situation.
What is happening today is in essence not all that different. The response to high unemployment caused by the recession has been a massive increase of the money supply. Since the end of the housing bubble, the Federal Reserve’s balance sheet (assets and liabilities) has almost tripled while in Europe the money supply has increased annually by double digits. Click here to read more.