Durable goods: The only shelter from stagflation?
In my recent Arab News article, I described the potential economic impact of any misguided US Federal Reserve asset purchase tapering. Focused upon the petroleum market, my advice to OPEC was (and is) to resist even maintaining, and to perhaps even decrease, output levels in order to protect oil prices from decline as the resulting taper tantrum takes place and if interest rates increase.
Can the US afford an interest rate increase though?
Today, it is perhaps wise to consider the politics of this possibility and the likely reactions by the US Federal Reserve to the many inevitable consequences of such a move.
First, it is important to note that at the end of the second quarter of this year, the US debt to gross domestic product ratio was 125.5 percent. This is down from a peak of
135 percent the year before but up rather dramatically from 103 percent pre-coronavirus (COVID-19) pandemic. Even more concerning is that the ratio has hovered around 100 percent since the end of 2012 when it spiked from 63 percent as a way of managing the 2008 financial crisis.
Second, the American unemployment rate is stated at 5.2 percent, which is well below the highs of the global health crisis but still notably above the pre-pandemic rate of roughly 3.5 percent.
Further, recently, Federal Reserve Chairman Jerome Powell noted to the US Senate Banking Committee that, “the unemployment rate was 5.2 percent in August, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year.”
In February, when the statistical unemployment rate was hovering around 6.3 percent, Powell pointed out that the real unemployment rate was likely to be around 10 percent but was understated due to “misclassification errors” and low labor force participation rates. It seems unlikely that the degree of understatement has declined since then.
Third, it should be clear to even the casual observer that the world is experiencing rather dramatic supply chain problems. These are not the petroleum-driven supply side shocks of the early 1970s but are rather ongoing and seemingly stubborn shocks driven by a shortage of labor due to stagnant wages, lockdowns, fear, as well as manufacturing being haphazardly constrained by COVID19-related firm closures. We are experiencing, in short, not a monolithic shock but rather one that is dangerously multifaceted. At least in part, these supply shocks have led to an American inflation rate of 5.3 percent.
We are not approaching a stagflationary environment as many in the finance media have suggested. We are in fact already in that environment and have been since April when the inflation rate jumped in the US from 2.6 percent to 4.2 percent. International trade has slowed, production has collapsed, and in order to maintain the stability of the American economy, debt has increased.
Given all of this, it seems rather odd that the US central bank has even mentioned a tapering of asset purchases and, much worse, noted a timeline for interest rate hikes.
The only other options for the US are to either grow its way out of the situation, something that did not happen with the
2008 crisis, or to embrace the inflation that must come with continued accommodative monetary stimulus and undoubtedly necessary fiscal policy.
It is also important to remember the social instability that characterized America during the stagflation of the 1970s. Social and political uprisings related to gender, race, socioeconomic class, the environment, and US foreign policy were common. Granted, many of these movements were a long time coming, but clearly the background of economic hardship did little to help the situation.
John W. Salevurakis is an associate professor
of economics at the American University in
Cairo and an author.