Transcript:
Easan Arulanantham:
What is stagflation? Versus a recession?
Tom Vaughan:
Okay, start with recession, maybe it’s easier to kind of go. A recession is a contraction in the economy. And it’s defined by two quarters of gross domestic product so that they measure the overall economic growth under something called GDP gross domestic product. And it’s a big number, and it’s a huge thing. But how much does it grow on a percentage basis, quarter over quarter, and even year over year, and, and a recession is where two quarters are negative, right? So the economy is contracting and going the wrong direction. In a recession, you normally do not have inflation, because the economy is slowing down. And if anything, you know, you might have more chance for deflation, where prices are dropping faster than people want. And so that’s a recession. That’s what most people are talking about as a possibility. But there is a pretty good sized group people talking about the possibility of stagflation coming up. Last time, we really had stagflation was in the late 70s, and early 80s. And that that is where you have slow growth of gross domestic product, or negative growth of gross domestic product, which would be like a recession, but you can also have just slow growth really low. And you still have inflation. So even though it’s not growing very fast, or even shrinking in terms of the economy, inflation still coming in, right. And so I mean, one of the things that’s pretty obvious, that causes something like that, oil prices, just go Go, go, go go.
Theoretically, that should drop when the overall economies all start to slow down. But there can be supply side issues, where there just not enough oil coming out to even meet this slightly lower demand. And it still brings the price up. And so when you see, you know, food, and energy is a big piece of the Consumer Price Index, certainly the part that’s really moving the most right now. And so that that’s where you can have stagflation. And we do kind of have those potential issues coming at us, if you think about it, food, we’re having trouble with wheat getting out of, you know, Ukraine. And so that could create a scenario where the price of food is going up, even if the economy started to slow down to a pretty low level or even contract. And of course, Russia could cut back on oil, or Europe could try to cut back on their use of that oil. And, and, and so going over to other places really jacked up the price, because now they’re bidding, hey, we don’t want Russian oil, we want this other oil. And so they’re, you know, bidding the price up. And so, you know, obviously, one of the things that can happen there is Saudi Arabia could step in, they have said that they would be willing to step in and replace Russia and loss of oil. So you know, we’ll see how that plays out. But those are scenarios that can cause that stagflation still have prices going up, even though the economy is very slow, growing or shrinking. And that’s a tough scenario, because generally speaking, wages aren’t doing well there. Stagflation is often associated as as, as as a recession is with higher unemployment. And so higher unemployment, the police don’t have the leverage, like they do now, please have leverage right now. To openings for every one person looking for a job gives leverage to that one person, you know, theoretically, and so, you know, wages aren’t growing, but your costs are going up. That’s That’s what that’s basically the misery index. Right. So that that’s what, that’s what we’re gonna see how this all plays out. It’s a pretty tricky road that Ron right now. So we’ll see how this goes.
Easan Arulanantham:
That’s the difference is one of the major issues with Stagflation is that the Fed kind of runs out tools, because if you raise interest rates, you’re causing more and more unemployment. Yeah. And so you can’t control the standards inflation with just raising rates.
Tom Vaughan:
That’s right. And that’s exactly right. And at least in the 70s, and 80s. You know, the parts that with oil, because OPEC basically did a restriction and created this big problem. And, yeah, there’s there’s only so many tools that the Federal Reserve has. And so theoretically, there might be more interest in trying to do stimulus to get jobs going or what have you. But of course, you do that you get higher inflation still. So personally, just my Outlook, I think we just need to live with some inflation here at a little bit higher level. They’re determined, at least in their words to get back down to 2%. I think it ought to be slower glide path to get They’re maybe get down to four for a while and then three and trying to get down to two even by the end of next year. That’s going to be really interesting to see it’s going to take quite a few things happening the right direction or for that to happen. So, but, you know, we’ll see how this plays out.