The payroll report is also a blow to the confidence of U.S. citizens who are already deeply worried by troubles on Wall Street, the collapse of the housing bubble, and credit problems linked to soured subprime mortgages.
The jobs news follows a recent Commerce Department report about the nation’s dismal performance in the goods and services sectors. According to the report, the nation's total output of goods and services grew just 0.6% in the fourth quarter.
Is It the Return of Stagflation?
Currently, the Fed, Wall Street, and Washington seem to be obsessed with fears of recession. But many economists are even more concerned about stagflation.
Stagflation is an economic term signifying slow GDP growth (stagnation) in combination with high inflation and high unemployment. The term was first used in the 1970s, when the economy experienced negative GDP growth for six quarters along with inflation of 12%.
Until the seventies, stagflation was believed to be impossible. Analysts couldn’t fathom how an economy could simultaneously be afflicted with inflation and low growth.
The Signals of Stagflation
Based on the latest economic indications, many economists are of the view that we’re already experiencing stagflation. The factors supporting this notion are numerous:
- M3 money supply figures show that overall liquidity is in the double digit range.
- The government’s continuous deficit financing owing to the Iraq and Afghanistan wars and heavy tax cuts have resulted in structural fiscal imbalances in the federal budget.
- Over-indebtedness along with an overall savings rate close to zero has led to rapidly rising foreign debt.
- The weak U.S. dollar fails to correct the worsening U.S. balance of payments.
- During 2007, inflation remained at 4.1%, which is very high in comparison to the 2.5% of 2006.
- The increase in wholesale prices could lead to even higher inflation in the near future.
- A lower currency would result in higher imported inflation, making it difficult to maintain low interest rates.
- Because the U.S. economy is closely tied to global markets, manipulating a single variable cannot have much impact on the domestic economy.
- Even if some drastic monetary policy shifts are taken now, they cannot produce instant results for the U.S. economy. It may take months before they are felt.
Many find it difficult to accept that the U.S. economy may be on the road to stagflation. The Federal Reserve, they argue, is taking steps to bring the economy back on track.
Nevertheless, it is late in the game now, and it may not be possible to take measures that can erase the damage done to the economy. Moreover, stagflation is a problem that cannot simply be solved with rate cuts.
Years of inept foreign policy, rising debt, the credit crunch, the plummeting dollar, and rising oil prices have brought the U.S. economy to a point from which there seems to be nowhere to go but down.
All the same, it would be a mistake to not soldier on. Stagflation, recession, and inflation are challenges to the economy that simply must be weathered on the road to progress.
