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Can Stagflation Happen Again?

Can Stagflation Happen Again?

Update: 2020-02-031
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Consumption accounts for 60% of GDP.


Back in the 1970’s many of the western economies experienced the so-called stag-flation. The simultaneous occurrence of both economic stagnation and inflation. Traditional Keynesian economists postulated that monetary stimulus by governments would create economic growth.


Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment. According to this theory, the growth in money supply would increase employment and promote economic growth. The 1970’s proved that this theory was not true.


Fast forward to today. We have central governments printing money like never before. However, it’s not having much of a stimulative effect on the economy. It’s inflating asset prices, but not creating a substantial jump in economic growth.


The other major factor that can’t be over-looked is demographics. If I observe my own behaviour, there was a time when I was willing to spend money on a large scale.


I remember ordering matching custom made leather sofas for our home. They were stunning. Today, my values have changed. I would never do that today. Perhaps it’s because I’m over 50. Maybe it’s the result of spending considerable time on board a boat and realizing that I don’t need all that stuff. There’s no question. I’m actively opposed to spending money these days. I want to invest, not consume. I’m putting increasing amount of money into assets and not into consumption. Am I also responsible for the economic slowdown?


I see other people my age spending less on consumption, even if they’re not investors. In our family, we took the decision to reduce our household from two cars to one. The number of times when both my wife and I need the car at the same time is hardly worth justifying the extra expense.


We have an economic system that requires never-ending growth in order to survive. Unless you have growth, there is no way to practically retire debt. Debt is borrowing from the future to spend money today. The only way that debt makes any sense is if you can have more money in the future.


If the growth isn’t there, then the only solution is the inflation of the money supply. In the world of inflation the currency get devalued. This has the effect of increasing prices. When prices rise, three things are affected.



  1. People on fixed income have their purchasing power eroded. They can’t spend as much on consumption. The only way to feed the consumption side of the economy in those cases is to make more consumer credit available.

  2. Savings get devalued.

  3. Debt gets devalued just the same way that savings do.


So the question is, are there new barriers to employment which are not influenced by monetary policy or fiscal policy?


If you live in California, the state government continues to make it less attractive to do business there.. New laws are making it less attractive to hire in the state of California. If the fed prints more money or lowers interest rates further, you’re not going to see a lot of new hiring happening in California. Access to credit isn’t what’s preventing more people from getting hired.


If you look at Japan, as soon as their population peaked in 2005 and started to shrink, you saw economic stagnation. In fact, today there are over 11M vacant, that’s right 11M empty homes in Japan. The birth rate and immigration are not sufficient to sustain the population. Japan’s population has continued to shrink and their fertility rate is currently 1.4, far below the 2.1 needed to maintain population constant.


The US population is growing through immigration, but only barely. If you want see our economic future look to Japan for a clue on how it might unfold. Increases in government spending and higher debt to GDP ratios have not help stimulate economic growth.

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Can Stagflation Happen Again?

Can Stagflation Happen Again?

Victor Menasce