Stagflation.
Let me be one of the first to utter that term in a contemporary context. The word “stagflation” was supposedly first used by a British politician in the 1960s to describe what happens when the worst of both worlds — a stagnant economy and inflation — come together.
Those of you who are old enough are already familiar with stagflation. Gerald Ford was president in 1976, and Jimmy Carter wanted his job. The economy was doing poorly under Ford and continued to be sluggish after Carter got his wish to reside in the White House.
But things got worse under Carter. The economy slowed even more, and inflation picked up — rising from 4.8 percent in 1976 to 6.8 percent in ’77 and reaching an incredible 12 percent by the 1980 election and then the recession.
Federal Reserve Chairman Paul Volcker raised interest rates rapidly (and cost me dearly on the first house I bought) to control inflation. Carter was out. Ronald Reagan was in.
Those of us alive back then understand what stagflation was.
Since I’ve already taken you down memory lane, let’s look at some of the economic details littering that road. The Federal budget deficit was $27.7 billion as Carter stood for re-election — an incredibly large amount by that day’s standards. And it would grow to $59 billion during the 1980 election year.
The projected budget deficit for 2014, in case you are wondering, is an optimistic $514 billion. And while that is lower than last year’s and much lower than at the height of the financial crisis, it’s still incredibly large considering our country already has $17 trillion-plus in outstanding debt. (And we’ll only have a $514 billion deficit if the economy picks up and tax revenues are on target.)
How much total debt did the US have in 1980? Around $931 billion.
So we already have the “Stag” part of that awful word in place. And if you listen to what came out of Ben Bernanke’s — and now Janet Yellen’s — Fed, we are anxiously awaiting (and even hoping for) the “Flation” part.
A story in one paper the other day even said that the Fed may be finally getting what it wanted — inflation.
The Fed is clearly worried about “deflation” — when prices and the value of things go down. But it isn’t mainly concerned about prices declining, which would be a good thing for consumers.
The Fed is really worried about assets declining, the same way that former Fed chief Alan Greenspan worried about inflation in the late ’90s.
But here’s where pundits are getting it all wrong. Nobody wants inflation for inflation’s sake. The Fed, like everyone else, would like prices to rise because the textbooks tell economists that will only happen when business conditions improve.
Begging for inflation while there’s a weak economy is too foolish for even the Fed. Hoping for inflation because it’s supposed to signal a healthier economy makes sense.
Minutes from the last Fed meeting will be released Wednesday. And you can be certain that a discussion about getting inflation up to a better level will be included. And you can be just as certain that Fed officials and the experts who dissect the communiqué will leave out the part about wanting a stronger economy to produce that higher inflation.
So all the chatter out of the Fed about desiring higher inflation might be nothing more than a smoke screen — nothing more than the Fed expecting higher inflation and pretending that’s exactly what it wants so the financial markets don’t understand the policy crisis facing the US central bank.
There’s also the problem of what to do when inflation arrives.
What’s supposed to happen is simple: When inflation rises, the current Fed — like Volcker did in the ’70s — will start to tighten monetary conditions. It will raise interest rates and make money more expensive for the people who are causing the inflation.
But things are a lot different these days.
Because of the enormous amount of liquidity the Fed has put into the financial system through conventional operations in the bond market and by means of the extraordinary Quantitative Easing money-printing gambit, it might be hard to slow inflation without wrecking an economy that isn’t doing very well to begin with.
A leak to the media this week seems to be evidence of that dilemma. A story in the Wall Street Journal said the Fed might try something new other than just raising interest rates to drain liquidity from the nation’s banking system. Something new means uncharted territory.
And whenever policymakers go into uncharted territory, it means they are scrambling for answers, something that a bunch of academics like those at our central bank often don’t do well.
Inflation is running at about 2 percent a year — right at the Fed’s target.
Jimmy Carter is still alive. So is Paul Volcker. Maybe they should be giving this year’s commencement addresses to all the new graduates who’ll be trying to start their careers in this economy. The topic should be stagflation.