The Dark Side of “Trumpflation”
Does Trump mean a return of stagflation?
A ghastly portmanteau of stagnation and inflation, the word conjures the darkest days of the disco era — stalled growth… high unemployment… soaring prices… bell-bottoms.
And some think it’s coming back for another ride in the saddle. Business Insider:
Since the election of Donald Trump, economists and analysts have once again begun to bring up the idea of stagflation hitting the U.S. economy. The combination of government spending and trade policies, coupled with an uncertain growth picture, have brought the disastrous specter of the late 1970s back into the economic discussion.
Ben Laidler, HSBC chief global strategist, with more:
A more “populist” Trump could see a dramatic disruption to trade which would weigh heavily on the global growth outlook, while a much tighter immigration policy could ultimately push the U.S. toward stagflation.
Trade barriers drive up the cost of imports. Immigration restrictions increase the cost of labor. Both drive up consumer prices. Some are calling the whole thing “Trumpflation.”
But it’s the government spending part that commands our attention today…
Fiscal stimulus promises to turn a cup of water into a gallon of wine. This through the conjuring power of the “money multiplier.” Every buck the government throws at a road or bridge does double-duty by generating another spent on widgets, gewgaws and all manner of services. That’s the theory.
But the money multiplier itself came in for hard sledding under the stagflation of the ’70s.
The ’70s saw the higher prices. So much so that Paul Volcker had to raise interest rates all the way to 20% in 1981.
But they didn’t see the growth that the “virtue” of rising prices promised. And the ’70s saw unemployment galore. Hence, stagflation.
Only when Volcker lassoed inflation did the Reagan boom commence in the early ’80s. And it was the end of the chapter for the money multiplier. Or so many thought…
Now the money multiplier, long dead and buried, is climbing out of the grave. The zombie’s parading as a hero, no less, now that eight years of monetary policy have proved a bust. Fiscal policy is the new (old) solution to get the economy jumping again.
But the zombie masked as hero could be Trump’s undoing…