Stuff You Should Know - What is stagflation?

Episode Date: February 24, 2011

When high inflation, slow growth and high employment combine, they result in an unfortunate economic situation known as stagflation. But what exactly is stagflation, and how does it work? Most importantly, how can we prevent it in the future? Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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They just have way better names for what they call, like what we would call a jackmove or being robbed. They call civil acid. Be sure to listen to the war on drugs on the iHeart Radio App, Apple Podcast, or wherever you get your podcasts. Brought to you by the reinvented 2012 Camry. It's ready. Are you? Welcome to Stuff You Should Know from HowStuffWorks.com. Hey, and welcome to the podcast. I'm Josh Clark. There's Charles W. Chuck Bryant, and this is Stuff You Should Know, the podcast. And we are going to be talking today about

Econ 101. That's right. This is Chuck's favorite subject. I think this in physics. I know. I know why I hate Econ. Why? Because I just money. I hate money. Some tough economist beat you up once. Yeah, yeah. No, just money. The whole thing. Emily pays all our bills. I can't even, if I had to do that. They said she's the CFO, right? Yeah. If I had to be the CFO, then we'd be in big trouble. Because I just, I don't like it. I don't like anything about it. Well, this is more less household economics, more macroeconomics. Yeah, this is interesting. There's a historical battle involved. The 70s,

people in Bell Bottoms probably. Jimmy Carter makes an appearance. Ronald Reagan, everybody. It's the whole cast of characters. Let's do it. Stagflation. Well, Chuck, I was reading an article, as is my way, about rampant inflation in 2011. Yeah. And basically, this guy named Michael Snyder was, is warning that we're going to see, I think as he puts it, inflation that we've never seen before in the US. And inflation is this huge boogeyman where money buys less because prices rise. And there's all sorts of reasons it comes about. But one of the, if you look at classic economics, the reason why inflation tends to happen

is that there's too much of something, right? The old supply and demand. Right. You have, in this case, too much money on the market. Therefore, since money is subject to supply and demand, more money there is on the market, the cheaper it is because there's more of it. The demand goes down. Sure. Prices go up, right, for the cost of goods and services. Exactly. And you have inflation. Yes. What this guy's warning about is that airline fares for the past holiday season were 30% more than they were the year before. I noticed. Price of food has been increasing. I've noticed. There's been a double digit health insurance premium raises. I haven't noticed. I don't think that that has anything to do with inflation. I think that's just the insurance

companies punishing the US. Okay. He also, he gives some other stats. Cotton, 40% increase beef, up 23%. Pork, up 68%. Hides are up 25%. Did you know that? I didn't know. Run for the hills. Hides are up 25%. And food prices especially are kind of a problem when inflation occurs because you need food to eat. Yeah, sure. That's very sensitive. And the USDA released their figure saying basically like, yes, pork's going to rise some, beef's going to rise some. But overall, the food cost inflation is going to be like 1%, which is definitely doable. If you look at the government statistics, right, our inflation is pretty much at zero, maybe 1%. Right now? Yeah, which is actually less than healthy. You want things to increase. You

want inflation to take place, but you want it to plod along at a very slow, steady rate. Inflation is the reason why up to say 2007, a house grew in value over 30 years. Thanks to inflation. You paid X number of dollars for it and it increased in value in large part because of inflation. So inflation is good as long as it's under control. Hyperinflation is really bad. The worst thing of all though is stagflation. And if inflation happens right now, we're prime in a prime seat for stagflation, which would be very, very bad. Do you want to tell everybody what stagflation is? Can I give a couple of stats? Sure. Because these will inform later on when we're talking about inflation. July 2008 is when it peaked in the last, let's just say decade.

Inflation? Yeah. July 2008, it peaked at 5.6%. So keep that number in mind. Okay, I'm going to write it down. And December of last year, so just a couple of short months ago, was about 1.5%. And the average for 2009 was negative 0.34%. Right. It's a negative percentage in 2009. And there's something to be said about deflation as well because that money that you do have, if you have any, becomes much more valuable. That's right. So keep those numbers in mind as we proceed here. Okay, I'm going to write it down. 0.34, negative 0.34. In 2009, and we peaked in 2008 at 5.6, which was a staggering number. I got it. Everybody, you can ask me if you need a reminder later on. So stagflation, Josh, is not something that we made up, even though I

thought it was something you made up. It describes a really bad, perfect storm of economic news. It's when you have high unemployment, a slow growth coupled with high inflation. And this is something that people didn't think was possible. No. And let's describe that. Let's point that out. Where we are right now, we have very high unemployment. I think it's at 10% nationally, pretty much. Getting better, but still high. Slow economic growth, for sure. We're in a recession after all. Still crawling out of it, trying to at least. Right. We're in a basically stagnant economy, which means it's growing very sluggishly or not growing at all. Yes. But our inflation is pretty good, thankfully. But since we have those other two, like I said,

we're in a prime spot for, if inflation does come along, we're in a prime spot for stagflation. The reason stagflation is so insidious, Chuck, is because it forms a vicious cycle, right? Yes. So you have high prices because of inflation, which means that people can't spend as much money or when they do spend money, it doesn't buy as much. Your dollars shrinking, essentially. Okay. So you have a shrinking dollar. You have high unemployment, which means people have less money to spend. Sure. Right. Your savings aren't worth as much. Right. Which ultimately leads to a sluggish economy. So there's no way to, for this thing to naturally cycle out of it. Right. Like this could keep going indefinitely. This horrible plotting along. What I think Carter

called malaise. Is that what he said? I think so. I believe it. Economic slowdown is normal. People don't, you know, a lot of people freaked out with the recession, but people really knew about it. Economics said recessions are kind of what corrects it in the end. Exactly. We talked about it. Yes. So don't freak out too much in our audio book. Yeah. We talked about how, if you look at the economy, it was made up of like a forest. There's a big, heavy, huge trees, which represent really well managed businesses. And then you've got the underbrush, which are just kind of add-ons. They're artificial almost. They shouldn't necessarily be there. They're kind of sucking off of the bubble speculation and artificially inflated economy.

Right. And then when the wildfire comes along, which is the recession, the underbrush is burned away. Right. And things correct themselves. Sure. It's a pretty dehumanizing way of looking at things, but so is economics. Yeah. You're right. And prior to the 70s, people didn't think this was possible because of our friend Mr. Keynes, John Maynard Keynes. It's stagflation. Yeah. It wasn't even a word before the 70s. Yeah. Well, we should point out to it. It's a contraction of stagnant and inflation if you didn't figure that out. Yes. So there that is. Did somebody thought it was stag party and inflation? Oh, really? Someone out there did. Yeah. Well, a lot of people thought bartering was bartending. The war on drugs impacts everyone, whether or

not you take drugs. America's public enemy number one is drug abuse. This podcast is going to show you the truth behind the war on drugs. They told me that I would be charged for conspiracy to distribute 2200 pounds of marijuana. Yeah. And they can do that without any drugs on the table. Without any drugs. Of course, yes, they can do that. And I'm the prime example of that. The war on drugs is the excuse our government uses to get away with absolutely insane stuff. Stuff that'll piss you off. The property is guilty. Exactly. And it starts as guilty. It starts as guilty. The cops. Are they just like looting? Are they just like pillaging? They just have way better names for what they call like what we would call a jack move or being robbed.

They call civil asset. Be sure to listen to the war on drugs on the iHeart radio app, Apple podcast or wherever you get your podcast. For the daily show and move on to the next person. Now we're doing it differently. I'm finally diving into some of the most incredible conspiracy theories that have been pitched to me at Trump rallies. Like, did you know that Osama bin Laden is a guy named Tim? Yeah, we're doing a whole episode on that one. JFK Jr. Coming back from the dead. That's an episode. The deep state, that too. We're going way down the rabbit hole. Listen to Jordan Klepper fingers the conspiracy on the iHeart radio app, Apple podcast or wherever you get your podcast. I noticed that we got a lot

of suggestions for bartending podcasts all of a sudden after the bartering podcast. People got their whistle wet. So if you're a Keynesian in your economic theory, you're going to favor supply and demand and you're going to think that's pretty much what it's all about. Demand is high. You got a booming economy. Prices are going to go up. Right. Inflation is going to rise some in relation to the economy rising. Right. What you're talking about is the Phillips curve, right? Yeah. Was that the Phillips curve? Yeah. So the x-axis of the Phillips curve is unemployment? Yes. And then the y-axis is inflation, right? Yeah. And that happened from about 58 to 73 post-war boom. Things were rising in sort of not a one-to-one ratio, but evenly. It even happened

before then. The Phillips curve is vetted. It is correct. Basically, as unemployment rises, inflation goes down naturally. And if you have low unemployment, inflation rises. The converse is true supposedly, right? Right. And the reason why is because when unemployment is high, demand is low. Therefore, inflation is down. Prices are low. So inflation is down. Right. And historically, this holds up. If you go back and chart all this up to the 70s, this was the case. And that's how it is naturally. The problem is the Fed in the 60s thought, well, if we just keep unemployment artificially low, we'll trade that off for slightly higher inflation, but we can keep on top of that. So we can expect high inflation and act

accordingly, but we'll have artificially low unemployment or near full employment, which is where everybody's employed. Yeah. They basically thought the rate of inflation would rise in a safe manner that they could keep up with. Yes. Do you remember, I don't know if I've used this before, but do you remember that Simpson's where Homer brings home pinchy the lobster? Have I used this one before? I think so, but I love that. And puts pinchy in the fish tank, and pinchy needs salt water, but the goldfish needs fresh water. So he keeps adding salt and then regular water until they're both half floating in the middle of the tank. Trying to balance it and he ended up killing both. Right. But that's kind of what you have to do if you're going to get

in and regulate the economy. If you're not just going to let it do its own thing, that's the trick you have to do. What a scary job. Oh, yeah. It's got to be terrifying. Can you imagine the pressure that Bernanke and those who preceded him are under? Yeah. Because history will make a villain or a monster or a hero out of you. Yeah. Depending on what you do. Absolutely. You're not going to just do nothing. You're going to leave an impression on, depending on what you did. Yeah. Like you can't go in and leave the Fed and be like, I'm not doing anything. You know, it's two thumbs and wouldn't want that job. This guy right here. So you said they got it wrong. Yeah. They got the Phillip. They got their interpretation of the Phillips curb wrong.

Yeah. And what that produces is called a wage, a price spiral. And we can get into more detail, but the long and short of it is that inflation rose faster than wages did. You want to know how? Let's hear it. Well, this is what basically bucked the Phillips curve is that through government spending like the government can spend on infrastructure, the public sector to create jobs, right? Through government spending and through, you know, tax policy that forms the way the government can create or manipulate aggregate demand. Okay. If say, for example, you keep taxes low and you increase consumer spending, you can kickstart an economy, right? Yeah. You keep unemployment low. You trade off for a higher rate of inflation like we saw they did. Right.

That's fine. That can conceivably work. The problem is they put too much money into an economy. Right. They kept pumping money into the economy no matter what. And what they found was like you said, the wage price spiral. And basically it's where prices rise. So the Fed knew that inflation was going to happen. But when inflation happens, prices rise. Right. When labor is sitting there working their tail off and prices are rising, they make the assumption that that means that industry, their bosses, their employers are making gobs of cash. Well, labor says we want some of that cash. So give us higher wages. Yeah, which they did to a certain degree. Right. But they couldn't keep up. But the problem with that, if you're a captain of industry, is that if you pay

more, that raises your cost of production, which means that you have to raise the price, which means that your employees need more money because of inflation. Right. And it creates this again, another vicious cycle. That's the wage price spiral. It spirals upward. Yeah. And basically, eventually employers stop increasing wages and inflation just takes off. And we might have survived that, Josh, in the 70s. As bad as it was, we might have eke through if it were not for the oil embargo of 1973. Yeah. When everyone knows oil went through the roof and that's not just, you know, Sally at the gas pump, that's across all industry. Yeah. And that coupled with everything else going on, all of a sudden in 1970, inflation was at 5.5%, which in July 2008,

I said it was 5.6. So in 1970, they thought it was high at 5.5. 74, 12.2. And then it peaked at 13.3% in 1979. And again, most economists agree that you want an economy that's inflating at about 2% a year. This is 13%. Yeah. I mean, in July 2008, at 5.6%, people were freaking and imagine 13.3%. So basically, Carter's just standing around just getting it from all sides. He's got hostages in Iran that he can't get released. He's got malaise forever. You've got a stock market that basically stopped working. Right. He's got brownouts and lines of the gas pump. And yeah, he's got an economy that's out of control of inflation. He has no idea what to do, right? Then insteps this guy named Paul Volcker. Can I throw in one more stat? Yes, please.

Talked about the stock market. From 70 to 79, the S&P 500 returned an average of 5.9% annually. Not too shabby. But when you've got the inflation, you subtract, you're actually losing money. The entire market is losing money. 2.6%, right? 2.6 percentage points lower than inflation. So basically, everybody was throwing in on the stock market during that time was paying 2.6% in losses. Yeah, not good. No, that's very bad, especially coupled with inflation. People, like you said, were freaking out, right? Okay. So bring us on to the savior of sorts. So Paul Volcker comes along and you might recognize that name, Chuck. He's an economic advisor to Obama. That's right. But he got his chops as the head of the Fed.

And in 1979, he basically says, okay, Keynesian liberal monetary policy is done. It's failing us or we're falling apart right now. We have to try something else. And basically, what they tried was the stuff that was created. It's called neoliberalism. It's created by a guy named Milton Friedman. Yes. And his basic formula was, quote, too much money chasing too few goods. So the feds free up too much money to circulate in the economy. And that's not a good thing. Right. So everything we see the Fed doing now is based on Friedman's economic policies, right? The war on drugs is the excuse our government uses to get away with absolutely insane stuff. Stuff that'll piss you off. The property is guilty. Exactly. And it starts as guilty.

It starts as guilty. The cops, are they just like looting? Are they just like pillaging? They just have way better names for what they call like what we would call a jack move or being robbed. They call civil acid. Of course. Be sure to listen to the war on drugs on the iHeart radio app, apple podcast, or wherever you get your podcasts. Conspiracy theories. We grab the sound bites, pack in the segment for the daily show and move on to the next person. If you go online, there's a whole list of pedophile symbols. Really? Yes. What's on your back? Q-flag. QAnon. One of those crazy people.

Now we're doing it differently. I'm finally diving into some of the most incredible conspiracy theories that have been pitched to me at Trump rallies. Like, did you know that Osama bin Laden is a guy named Tim? Yeah. We're doing a whole episode on that one. JFK Jr., coming back from the dead, that's an episode. The deep state, that too. We're going way down the rabbit hole. Listen to Jordan Klepper fingers the conspiracy on the iHeart radio app, apple podcast, or wherever you get your podcasts. Remember we said that with the Fed in the 60s and then the 70s, that their whole thing was throw more money at it because that'll increase spending, which will increase demand and yada yada, everything will be fine. In the midst of this

emergency, what's considered the fatal flaw they made was that rather than start sucking up some of this money to make it more scarce and to hence make it more valuable, they pump more money into it. Well, Volcker comes along using Friedman's ideas and says, we've got to get some money off of the market, so we're going to start buying it up. And what they did was they started issuing treasury bonds. They sold T-bills. That's how the government issues and purchases debt. And that's how they control the amount of money on the market. You know that. Yeah. That's Friedman's ideas. So when the economy is good, they're going to raise interest rates to slow down the flow of money, basically. Yeah, because bubbles know better than a recession. Yeah, and the same in

reverse, when the economy is tanking, they're going to lower the interest rate and say, hey, go out and buy a house because look how low it is. Exactly, which is exactly what they're doing right now. What we're seeing right now, it was started in 1979 and it didn't really exist, at least in practice in the United States before then. Apparently, Friedman and his people tested out these theories as neoliberalism in Chile when Augusto Pinochet and his US-backed CIA coup took over. The Friedman's Chicago school people went down there and were like, hey, let us help you set up this new economy and test that out. Yeah, that's what happened in Iraq. Apparently, it was designed to figure out how to get the US mits in other countries' coffers

by setting up an economy that was very friendly to capitalism. It happens here now, too. One of the results of it, Chuck, is when you cut off the flow of money, and this is the reason why the Fed in the 60s and 70s didn't think to do this. When you cut off the flow of money, that means companies have less money. Demand goes down and people get laid off. Since the focus of the Fed during the post-war boom and up into the late 70s was to keep unemployment as low as possible. It was all on jobs at the time. Right. The way Friedman looked at it was the opposite. No, you don't focus on that. You focus on keeping the economy growing in a manageable pace. Maybe don't worry quite so much about unemployment. As a result of that, you took

off money, unemployment goes up. Inflation, in fact, is what the current standards think controls the economy more so than the joblessness rate. Right. Interesting. Well, there's less focus on although it is a factor and a cause for concern. It's nothing like it was as far as Fed monetary policy went in the 60s. The thing is Friedman gets tons, Friedman and Volcker get tons of credit. Right. But they fix the economy by kicking in, like basically kickstarting a recession. Yeah. And the recession was painful, but then inflation stabilized. So it does work, but you're going to have to go through a recession. Well, yeah. And the trick is, this is the Fed has to predict the short-term and the long-term and they have to identify

where that exact point is, or maybe not exact, but they need to ballpark it pretty close when they need to start controlling that money flow again. And the interest rates and good lord, it's all in the hands of a few, isn't it? Right. Well, if you raise interest rates too early, what you're going to do is stop borrowing. You're going to stop growth. Right. So if your economy hasn't really been kickstarted and is on its own, then you're going to push it right back into a recession, a double-diff recession. Right? Yeah. If you wait too long, then there's going to be too much money on the market, which is what that guy I was talking about at the beginning is worried about. That there's a lot of money in cash reserves and banks and people hoarding it,

but once it eventually hits the market, our inflation is going to just go through the roof. Is he worried about stagflation? Does he think it's coming? He's worried about inflation. And if we remain in these factors, then I'm saying that would cause stagflation. Right. But I guess I got one last thing. What you got? The irony of Friedman's success proves the Phillips curve works. Yeah. When his policies carried out by Volcker kicked in unemployment, unemployment rose, inflation went down. Yeah, you're right. I've never felt so helpless in my life. Yeah, we're in trouble. We're just small, but small little pieces in this whole puzzle.

Yeah, we are. That's why they call it macroeconomics. And that's why you're concerned with microeconomics. Well, yeah. Because you love your CFO. Exactly. The end. And my house rate just reset lower. So I'm all I'm all happy right now. I said the end. Oh, sorry. If you want to learn more about stagflation, can I borrow some money then, Chuck? No, because that's going to be used to pay down other debt. It's all a big vicious cycle like we thought. Oh, well, while we're on it, while you're talking about debt, FYI, if you have fixed debt, right? Yeah. Let's say you owe somebody $12. Best time to pay that money off is when inflation is high. Money's cheap and abundant. Oh, yeah. Good point. Yeah. It's best to save when

money's cheap. Right. Or when money's expensive. Right. All right. So that's it, right? True or words have never been spoken. That is it. If you want to learn more about stagflation and see a really sad line of 1980s auto workers in Detroit, you can type in stagflation in the search bar at howstuffworks.com. And as always, we encourage you to read all of our economics articles because they are fascinating. I said search bar, right? Well, that means it's time for a listener mail. Hey, guys, this is from Jason. Hey, guys, how's it going? I hope all is well. Catching up on the podcast and Chuck mentioned that he had a big wheel but wanted a green machine. Well, my first memory actually is of a green machine. My friend Boomer got one and my mom

dot, who is the greatest mother ever, by the way, and I lived in an apartment complex. She was sitting on the bench outside with her neighbor and I went to the top of the hill to try this green machine out. Came down as fast as I could because that's what you do. And I figured I would skid right out in front of the bench. I was going very fast though, pulled the handbrake the last second and the handbrake came off completely in my hand and I remember thinking, uh-oh. Then I was in my neighbor's arms running for the car as I crashed into the bench, busted my face and eye wide open. At the hospital, they had to put me in a straight jacket in order to stitch up my face. He's freaking out. I guess so. My eye was stuck

shut for a few weeks and my very next memory is the night my eye opened. I was at my grandmother sis's house. What? He's either talking about his great aunt or his grandmother was named sis. Okay. Okay. When it opened, I was really excited. I showed my grandmother, she told me to shush, his tic-tac dough was on. Remember that show? I love that show. Uh, lol, he says, these moments made me laugh so hard. Thank you Chuck and Josh for talking about the green machine and letting me reminisce. That's from Jason in Baltimore, Maryland. Way to talk about the green machine, Chuck. It was the best. It's good news. I bet you could find those on the ebay. They'll cost you some money. Maybe. So if you've got, I got nothing. Do you have one? Oh, I don't know. Jerry

got my green machine. How about if you've got a story about someone, your nemesis getting something that you deserved? Good one. Very good one. Okay. What Chuck just said, wrap it up, spank it on the bottom, send it in an email to stuffpodcast.howstuffworks.com. For more on this and thousands of other topics, visit howstuffworks.com. To learn more about the podcast, click on the podcast icon in the upper right corner of our homepage. The How Stuff Works iPhone app has arrived. Download it today on iTunes. Brought to you by the reinvented 2012 Camry. It's ready. Are you? The war on drugs is the excuse our government uses to get away with absolutely insane stuff. Stuff that will piss you off. The cops, are they just like looting? Are they just like pillaging? They just

have way better names for what they call like what we would call a jack move or being robbed. They call civil answer for it. Be sure to listen to the war on drugs on the iHeart radio app, Apple podcast or wherever you get your podcast. Welcome to Crash Course, a podcast about business, political and social disruption and what we can learn from it. I'm Tim O'Brien. Every week on Crash Course, I'm going to bring listeners directly into the arenas where epic upheavals occur and I'm going to explore the lessons we can learn when creativity and ambition collide with competition and power. Listen to Crash Course every Tuesday on the iHeart radio app, Apple podcasts or wherever you get your podcasts.