One of the great risks of the stagflation scenario is what economists call a "balance sheet recession", where people put off consumption and purchases in favor of paying down debt and clearing off their credit cards.
When this becomes a prevailing phenomenon you have reduced consumption, and theref…
One of the great risks of the stagflation scenario is what economists call a "balance sheet recession", where people put off consumption and purchases in favor of paying down debt and clearing off their credit cards.
When this becomes a prevailing phenomenon you have reduced consumption, and therefore reduced demand, which removes the primary source of upward price pressures in the marketplace. That in turn creates a disincentive for suppliers who will either cut back on production or exit markets altogether.
The new equilibrium pricing position is reached not only is there less supply and less demand, but less employment and less income as well.
Another possible scenario is that, instead of seeing a replay of the Great Financial Crisis in 2008, or even the 1930's Great Depression, we might be slipping into a correction more similar to the Long Depression of the 1870s.
The Long Depression is chronicled in the US as lasting five years, but it was part of a larger global economic downturn that for much of the world lasted nearly 20 years.
One reason that has been put forward for the Long Depression was that technology and innovation had reached a cyclical peak, and a measure of retrenchment was necessary before business structures could embrace a new round of innovation.
Whether the US and the world are similarly at the end of an innovation cycle is not something that can be accurately gauged until well after the fact, but there are reasons to suspect that might be the case. If that is the case, a new market shock like the subprime mortgage crisis and subsequent Great Financial Crisis could trigger an extended retrenchment/"lost decade" reaction across the global economy.
It's worth noting that the global economy was far less integrated in 1873 than it was in 1929, 2008, or today. Integration has been an increasing aspect of the global economy from 1873 until today. The consequences of a market shock in a major financial market such as Wall Street will absolutely have global ramifications even greater than in 2008.
As always, thank you for your kind words.
One of the great risks of the stagflation scenario is what economists call a "balance sheet recession", where people put off consumption and purchases in favor of paying down debt and clearing off their credit cards.
When this becomes a prevailing phenomenon you have reduced consumption, and therefore reduced demand, which removes the primary source of upward price pressures in the marketplace. That in turn creates a disincentive for suppliers who will either cut back on production or exit markets altogether.
The new equilibrium pricing position is reached not only is there less supply and less demand, but less employment and less income as well.
Another possible scenario is that, instead of seeing a replay of the Great Financial Crisis in 2008, or even the 1930's Great Depression, we might be slipping into a correction more similar to the Long Depression of the 1870s.
https://libertystreeteconomics.newyorkfed.org/2016/02/crisis-chronicles-the-long-depression-and-the-panic-of-1873/
The Long Depression is chronicled in the US as lasting five years, but it was part of a larger global economic downturn that for much of the world lasted nearly 20 years.
One reason that has been put forward for the Long Depression was that technology and innovation had reached a cyclical peak, and a measure of retrenchment was necessary before business structures could embrace a new round of innovation.
Whether the US and the world are similarly at the end of an innovation cycle is not something that can be accurately gauged until well after the fact, but there are reasons to suspect that might be the case. If that is the case, a new market shock like the subprime mortgage crisis and subsequent Great Financial Crisis could trigger an extended retrenchment/"lost decade" reaction across the global economy.
It's worth noting that the global economy was far less integrated in 1873 than it was in 1929, 2008, or today. Integration has been an increasing aspect of the global economy from 1873 until today. The consequences of a market shock in a major financial market such as Wall Street will absolutely have global ramifications even greater than in 2008.