Stagflation And Other Misconceptions

The perceived need to have a distinct label for the supposedly strange coupling of rising prices and falling growth stems from the erroneous belief that strong economic growth causes prices to rise and weak economic growth causes them to fall. The reality is the exact opposite -- strong economic growth puts DOWNWARD pressure on prices because it involves an increase in the supply of goods and services. If monetary factors are constant while the supply of goods and services increases then the same amount of money will be 'chasing' a greater supply of 'stuff', and the average price of 'stuff' will fall. By the same token, if monetary factors are constant while the economy shrinks then the same amount of money will be 'chasing' a smaller supply of 'stuff', leading to HIGHER prices.

inflation is a deficiency in the monetary unit and shouldn’t be confused with supply/demand of goods and services.

For example, if I measure a tree that was 1 foot yesterday and it is now 2 feet today, I would assume it was natural growth. But if the definition of a foot changed, what we have is inflation, not growth. The tree didn’t change but it is now measured as 2 feet. What we want is a constant foot so that we can clearly see if the tree grew or not. But we shouldn’t try to artificially constrain the natural growth of the tree.

He's making some good points; and some points that are flat out wrong.

For instance, normally when the economy is growing strongly, the demand for labour rises faster than the supply — thus leading to higher wages — which leads to inflation. When the economy slows, demand for labour decreases, unemployment increases, wages drop, and therefore inflation drops. Until the stagflation of the late 1970's & early 1980's, economists believed that this relationship between employment levels and inflation always occurred and it was expressed in the Phillips Curve.

The original stagflation was a direct result of the price in oil prices engineered by the OPEC cartel. The higher oil prices created the inflation — and drained money from western economies at the same time. If it weren't for the monopoly powers of OPEC, oil prices would have decreased, in response to reduced demand (as the stagnation set in). The recent drop in world crude prices shows that things are different today — oil prices are responding to market pressures; rather than being kept high by dint of monopoly power. The economy is much more likely to self-correct today, than it was when OPEC monopoly power was creating stagflation.

strong economic growth puts DOWNWARD pressure on prices because it involves an increase in the supply of goods and services.

Please correct me if I'm wrong, but this would only be true if DEMAND remained constant. DEMAND for goods and services tends to INCREASE with strong economic growth.

This guy might know even less about economics than I do....

True, demand does tend to increase with economic growth as more consumers have more discretionary funds available to gain access to wants.

However, strong economic growth also entails an increase in supply of the goods or services to fill the vacuum that the current demand is placing on the market. Whether it be through expanded production or increased competition, the investment in increased production will eventually outpace increased demand until the investment dollars are diverted to better financial opportunities.

The bottom line is, printing too much money causes inflation whether the market is growing or in recession.

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