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Friday
Jan252008

Joseph Stiglitz on why we are at the brink of stagflation

Joseph Stiglitz, Nobel Laureate in Economics and author of the book Making Globalization Work, recently posted a column Stagflation Cometh.  He concludes by hoping central bankers around the world will understand that much of their inflationary pressures are being "imported" and not raise interest rates, as would be appropriate if the inflationary pressure arises from excess domestic demand.  But the most interesting part of his piece is his assessment of why we are where we are.  Here are two key paragraphs: 

"Until now, three critical factors helped the world weather soaring oil prices.  First, China, with its enormous productivity increases--based on resting on [sic] high levels of investment, including investments in education and technology--exported its deflation.  Second, the United States took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble, with mortgages available to anyone not on a life-support system.  Finally, workers all over the world took it on the chin, accepting lower real wages and a smaller share of GDP. 

"That game is up.  China is now facing inflationary pressures.  What's more, if the US convinces China to lets its currency appreciate, the cost of living in the US and elsewhere will rise.  And, with the rise of biofuels, the food and energy markets have become integrated.  Combined with increasing demand from those with higher incomes and lower supplies due to weather-related problems associated with climate change, this means high food prices--a lethal threat to developing countries." 

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