Stagflation Cometh

Slower economic growth – or possibly a recession – in the US will inevitably cause a global slowdown. And if central banks fail to respond appropriately to growing inflationary pressures – recognizing that much of it is imported, and not a result of excess domestic demand - we should prepare for the worst: another episode of stagflation.

New York – The world economy has had several good years. Global growth has been strong, and the divide between the developing and developed world has narrowed, with India and China leading the way, experiencing GDP growth of 11.1% and 9.7% in 2006 and 11.5% and 8.9% in 2007, respectively.  Even Africa has been doing well, with growth in excess of 5% in 2006 and 2007. 

But the good times may be ending. There have been worries for years about the global imbalances caused by America’s huge overseas borrowing. America, in turn, said that the world should be thankful: by living beyond its means, it helped keep the global economy going, especially given high savings rates in Asia, which accumulated hundreds of billions of dollars in reserves. But it was always recognized that America’s growth under President George W. Bush was not sustainable. Now the day of reckoning looms.

America’s ill-conceived war in Iraq helped fuel a quadrupling of oil prices since 2003. In the 1970’s, oil shocks led to inflation in some countries, and to recession elsewhere, as governments raised interest rates to combat rising prices. And some economies faced the worst of both worlds: stagflation.

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