Ive here. The potential for stagflation was already high before the immediate effects of the war (the closure of Black Sea shipping hurt wheat and fertilizer shipments) plus sanctions, formal sanctions and self-sanctions. As we’ve said repeatedly, higher energy prices cycle through all products.

Stagflation hurts investment in two ways. The first is that high interest rates mean a lower net present value when you discount future cash flows. The result is that only projects with high short-term returns look good. Another reason is that businesses become uncertain about their results as the items on their balance sheets balloon at different rates. When investors start worrying about FIFO vs. LIFO accounting for inventories, you know inflation is a problem.

While everyone but hard asset owners suffers, it is the poor hardest hit, be they poor in rich countries or large segments of the population in emerging economies.

By: Adjunct Professor at Western Sydney University and UNSW (Australia), Anis Chowdhury, who held senior UN positions in New York and Bangkok, and Jomo Kwame Sundaram, former Professor of Economics and UN Assistant Secretary-General Kwame Sundaram) economic development and was awarded the Vasily Leontieff Prize for advancing the frontiers of economic thought.Originally Posted in Jomo Kwame Sundaram’s website

The specter of “stagflation” threatens the world again. This time, the risk is the direct consequence of political provocation and war, not just due to irresistible economic forces.

Stagflation?

Stagflation is a compound word that means inflation and stagnation. Stagnation refers to weak, “near-zero” growth that inevitably fuels unemployment. Inflation refers to price increases – not high prices as is often implied.

Presumably, the term “stagflation” was first used in 1965 Ian McLeod, then the British Conservative Party economic spokesman. He later became Chancellor of the Exchequer or Treasurer in 1970 for just over a month, the shortest term in modern times.

In 1965 he told the British Parliament that with incomes “growing rapidly” and production “completely stagnant”, “we are now in the best of both worlds. We have a stagflation situation”.

The term became popular in the 1970s, when high inflation and unemployment ended a period ofthe golden age of capitalism‘ describes the post-World War II (WW2) boom.

Typically, in a recession, the rate of inflation — the overall rate at which prices are rising — falls. As unemployment rises, wages come under pressure, consumers and businesses spend less, demand for goods and services dwindles, and price increases slow.

Likewise, when the economy is booming, the labor market tightens, pushing up wages, which in turn are passed on to consumers through higher prices. As a result, inflation rises and unemployment falls during boom times.

However, stagflation presents a dilemma for central banks. Typically, when the economy stagnates, central banks try to stimulate growth by lowering interest rates and encouraging more borrowing and spending.

But it could also fuel further price increases and higher inflation. On the other hand, if they raise interest rates to curb inflation, growth could slow further, further worsening unemployment.

Stagflation in the 1970s

Growth in world trade after World War II increased demand for the dollar, the de facto world currency under the 1944 Bretton Woods (BW) International Monetary Agreement. As the Cold War began, the United States provided substantial funding for post-World War II reconstruction to expand its “free world” sphere of influence.

After rebuilding after World War II, demand for dollars was met by more U.S. imports paid for in dollars. Fund flows reversed in the 1960s as foreign central banks increasingly accumulated dollar reserves, with net resources flowing in rather than out of the United States.

During the 1960s, US economic growth became increasingly dependent on government military and social spending. “Defense” (especially the Vietnam War) and social programs (such as President Lyndon Johnson’s “war on poverty‘ and ‘big society‘.

like LBJ Reluctance to admit the rising costs of the Vietnam Warit’s hard to raise taxes to pay for his’sword and plowshare‘expenditure. Instead, spending is funded by government debt, which comes from the sale of U.S. Treasuries. So the world financed US government spending, including wars.

By January 1967, Johnson was under pressure to cut the growing budget deficit. But it took Congress a year and a half to pass his new budget and raise taxes. When it finally passed in mid-1968, the U.S. federal debt grew even more because spending on “guns and butter” hadn’t fallen.

U.S. monetary policy is mandatory expansionary. Unsurprisingly, inflation soared from 1.1% in 1960-64 to 4.3% in 1965-70. Higher inflation also eroded the competitiveness of the United States, further exacerbating its balance of payments deficit.

Inflation has also diminished the ability of the United States to meet its BW commitment to maintain full convertibility of $35/oz of gold. Foreign governments and currency speculators have not ignored this obligation.

As inflation rose in the late 1960s, dollars were increasingly converted into gold. In August 1971, US President Richard M. Nixon ended the exchange of dollars for gold by foreign central banks, effectively violating his BW commitment.

A last-ditch effort to save the international monetary system—through a brief Smithsonian Agreement – quickly failed. By 1973, the BW international monetary arrangement was effectively implemented after World War II.

Disruption of the supply of goods

Oil exporters, Europe and others with dollar reserves suddenly found their assets significantly less valuable. For Venezuela, the Organization of the Petroleum Exporting Countries (OPEC), led by the Middle East, has responded by backing away from its earlier willingness to keep oil prices low.

In October 1973, “nationalist” Saudi monarch Faisal banned oil exports to countries that supported Israel, shortly after President Anwar Sadat attempted to retaliate after Egypt was defeated by Israel in 1970. Oil prices nearly quadrupled—from $3 a barrel to nearly $12. ended in March 1974.

The sharp rise in oil prices has been accompanied by huge Other commodity prices rise Between 1973-74. With the exception of oil, prices of other commodities more than doubled between mid-1972 and mid-1974. Meanwhile, the prices of some commodities, such as sugar and urea, have more than tripled.

Commodity supply shocks and rising commodity prices increase production costs, consumer prices and unemployment. As consumer prices rise, it triggers demand for higher wages, which in turn pushes consumer prices up. Thus, the wage price spiral accelerates price increases and inflation.

The 1979 Iranian Revolution triggered a second oil price shock. the resulting ‘Great inflation‘Saw US prices rise more than 14% in 1980. In the UK – then considered the “sick man of Europe” – inflation averaged 12% per annum in 1973-75, Peaked at 24% in 1975while inflation in West Germany and Switzerland is over 5%.

Unemployment rates in seven major industrial countries – Canada, France, West Germany, Italy, Japan, the UK and the US – in the 1960s Rarely exceeds 3.25%. But in the 1970s, the unemployment rate never fell below this level. By mid-1982, interest rates had risen to 8%, ostensibly to fight inflation, which was exacerbated by rising interest rates.

The slowdown in growth in the major industrial economies in the 1970s — with rising unemployment and inflation — caught many economists off guard. Economic thinking at the time assumed inflation and unemployment were the alternatives.

The Phillips curve implies that low unemployment comes at the expense of high inflation, and vice versa. This crude and static caricature of Keynesian economics makes a major attack on its influence. The attack on development economics in this “counter-revolution” is collateral damage.

Peace is our best choice

In October 2021, the International Monetary Fund, the European Central Bank, the Federal Reserve and other institutions believed that the factors driving inflation were temporary. None of these authorities saw an urgent need to raise rates.

But in the last month, the war in Ukraine and sanctions on Russia pushed up the prices of commodities such as wheat and oil. This will exacerbate rising inflation in most developed countries. The threat of stagflation is certainly more real now than it was six months ago.

Googling “stagflation” by October 2021 reach their highest level Since 2008.Online news reports mention stagflation soared to over 4000 Weekly through mid-March, up from more than 200 at the beginning of the year.

This time, “stagflation” is a direct consequence of political choices, especially war, rather than an inevitable economic trend. Developing countries are quickly learning about their true place in this unequal world of endless wars, for example, Europe treats Ukrainian refugees.

Therefore, peace is imperative. The other option is a savage conflict between great powers, in which most of us have no vested interest. Instead, our shared hope lies in securing peace, and instead focuses on the common challenges facing humanity.