Stagflation is one of the most feared and destructive phenomena in economics. Soaring fuel and food prices are now rippling through the world economy, as growth grinds to a halt. Within the U.S., the government reported the loss of 60,000 jobs in June and a 9.8 percent surge in wholesale prices in July.
The questions are why is this happening and what comes next? Is it simply the rise in the cost of petroleum, or are other factors at work? Are international agencies doing anything to help? And who, if anyone, benefits, and where does geopolitics enter in?

A REPEAT OF THE 1970s?

"Stagflation," according to the Financial & Investment Dictionary, is a "term coined by economists in the 1970s to describe the previously unprecedented combination of 1) slow economic growth and high unemployment (stagnation) with 2) rising prices (inflation)."
The U.S. had emerged from World War II as the global economic powerhouse. But by 1970, other nations, especially Japan and Germany, who supposedly had lost the war, were catching up.
During the 1970s, U.S. inflation averaged around 7.5% annually and unemployment around 6.4%. The compound effect was devastating, as shown by U.S. trade figures. Until 1974, the U.S. was still maintaining a slightly positive trade balance of exports over imports, but that year a trade deficit emerged which by the early 1980s had exploded to over $100 billion annually and today is over $800 billion a year.
The chief culprit was said to be skyrocketing petroleum prices engineered by the Organization of Petroleum Exporting Countries (OPEC). Around this time, world economic power began to shift, which the stagflation may have signaled or even brought about.
Back then, the U.S. had the world's largest economy by far. Now, a quarter century later, it has been overtaken by the combined economies of the European Union, [1] while Japan is entrenched in third place. [2] But China, Brazil, Russia, and India [3] have been on the rise, with close to double-digit GDP growth annually.
Now, the new wave of stagflation which began early this year is raising alarms worldwide. Not only are the populations of the U.S. and other developed nations feeling the pinch, but the rapidly growing economies of the developing world are imperiled. The impact on the world's power structure could be profound.

"STAGFLATION FEARS RETURN"

"Stagflation Fears Return," headlined the Wall Street Journal on February 21, 2008. In an article for Guardian.co.uk (1/2/08), Joseph Stiglitz, former chief economist for the World Bank and winner of the Nobel Prize for Economics, wrote, "The fallout from a combination of rising inflation and global recession seems inevitable. How can the world's economies survive it?"
Stiglitz's concern is that in order to contain inflation, the Federal Reserve will be forced to raise interest rates as it did in 1979. That was the year Fed Chairman Paul Volcker began to jack up rates to a level that eventually exceeded twenty percent. The action brought on the worst U.S. economic downturn since the Great Depression.
In the end, the recession of 1979-83 wrecked the U.S. producing economy, cut per capita steel production in half, created the infamous "rust belt" in the Midwest, and gave the country its anemic post-modern "service economy."
In order to escape from that recession, the Reagan administration deregulated the U.S. financial industry, allowing it to substitute financial bubbles for industry-driven economic growth.
Still, these bubbles, such as the prolonged dot.com bubble of the 1990s, filled the pockets of U.S. consumers with cash they then could use to purchase products from abroad. So their spending became the engine for the economies of many nations around the world, especially developing countries like China, India, and Indonesia.
But the dot.com bubble burst in 2000-2001, with $8 trillion in wealth being wiped off the books. Then from 2002-2005, after the Fed under Chairman Alan Greenspan slashed interest rates, and the mortgage industry began to sell loans to anyone who could walk through the door, a new bubble grew that accounted for half of U.S. economic growth. It's the bursting of the housing bubble that now has the U.S. economy in a tailspin and is dragging the rest of the world down with it.
Today those heady days of easy credit are gone. Recession is settling in, and the world has taken notice.
Says Joseph Stiglitz:
"...Slower growth-or possibly a recession-in the [U.S.] inevitably has global consequences. There will be a global slowdown. If monetary authorities respond appropriately to growing inflationary pressure-recognizing that much of it is imported, and not a result of excess domestic demand-we may be able to manage our way through it. But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst: another episode of stagflation."
So far the Fed is not making any moves either to raise or lower rates, probably to keep a worse crisis from occurring before the November presidential election. After that, the Fed seems likely to raise rates in order to ensure the inflow of foreign capital needed to help finance the continued U.S. trade and fiscal deficits. The federal deficit, for instance, is projected at $482 billion for fiscal year 2009.
Fortunately for President George W. Bush, he will bequeath this enormous set of problems to his successor, whoever it is that wins the election. But it's likely to be bad news for that person, along with the rest of the world.

WORLD OUTLOOK

Without a doubt, economic growth is slowing worldwide, including Europe. Chris Irvine, reporting for the Telegraph UK, wrote on August 22, 2008: "Half the world economy, including the UK, is in recession or on the brink, according to research from Goldman Sachs. The investment bank has warned that the world's major economies, including the US, Japan, the Eurozone, and the UK, are either in recession or face significant recession in the months ahead."
Irvine also noted that, "France and Germany's economies have shrunk in the second quarter of the year, along with Japan's. Meanwhile, many fear that the UK's official statistics will soon show the economy shrinking."
In fact, some unsettling data for the UK came out the same day. The Financial Times reported: "Sterling tumbled on Friday as official figures showed UK economic growth ground to a halt in the second quarter of this year, strengthening fears the economy is already contracting. The Office for National Statistics revised its first estimate of second quarter growth by more than expected, as it said output had been flat quarter on quarter, the lowest figure since the second quarter of 1992."
A week earlier, the Bank of England reported that the UK saw unemployment rise by 60,000 in the second quarter. According to the Financial Times, the Bank's quarterly inflation report showed that:
"The headline consumer price index rose at an annual rate of 4.4 per cent. The RPIX index, a better indication of the actual cost of living for consumers, was up by an even greater 5.3 per cent, and the rise was broad-based. Food and fuel inflation may be worst, but prices for a large part of the CPI basket are rising much faster than the two per cent inflation target. Such ubiquitous price rises increase the chances of higher wage demands from consumers in order to compensate."
The problem for consumers is that, with jobs disappearing, so does their leverage to seek higher wages. That's why stagflation is ruinous for working people and their families. [4] It's often to dampen down higher wages that central banks raise interest rates in the first place.

DIRE WARNINGS FROM THE INTERNATIONAL MONETARY FUND

It's the International Monetary Fund (IMF) that most closely reflects the official viewpoint of both the governments of the developed nations, especially the U.S., and global capitalist finance.
The IMF is putting out dire warnings. Using unusually strong language in a July 18 press release announcing its updated World Economic Outlook, the IMF highlighted three major trends:

"Global growth to slow significantly in second half of 2008;
"Rising energy, commodity prices have boosted inflationary pressure;
"Need to adapt to shift in purchasing power from commodity users to producers."

The first two trends-slowing of global growth and rising energy and commodity prices-are in line with statements being made by other commentators on the stagflation dangers. But the third statement, a "shift in purchasing power from commodity users to producers," is ominous, because it implies a change in the political dynamics as well.
Further in its press release, the IMF indicatesd that the dangers are worse for developing countries-obviously including China and India-than for the more advanced nations of the West. The IMF stated:
"In emerging and developing countries, inflationary pressures are mounting faster, fueled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 percent and 7.4 percent, respectively, and the moderation in inflation in 2009 will depend on more assertive tightening of monetary conditions."
The IMF added:
"In many emerging economies, tighter monetary policy and greater fiscal restraint are required, combined in some cases with more flexible exchange rate management.... In emerging economies stronger action is likely to be needed to cool activity and reverse rising inflation momentum."
The IMF, in using its full array of ominous sounding code words, clearly has something up its sleeve.
The IMF makes it crystal-clear that food and fuel price hikes are threatening hundreds of millions of people with severe consequences. It said:
"The threat of hunger has dramatically raised the stakes for low and middle-income countries that rely on imported food and fuel. These countries must now figure out how to feed the hungry and maintain macroeconomic stability...."
In a separate policy paper entitled, "Food and Fuel Price Spiral: How Countries Can Cope," the IMF made a number of recommendations:

Do not subsidize food and fuel prices, because that encourages consumption; in other words, consumption should be cut back; thus, the IMF says, "It makes sense to pass on the full price increases to consumers."
Don't lower taxes: "Reducing consumption tax rates and excise taxes leads to higher consumption."
Raise domestic bank interest rates, thereby "using monetary policy to avoid more general price increases."
Lower trade barriers: "Tariff reductions can help by reducing inefficient trade distortions and mitigating price increases."
Alter monetary policy: "A tightening of monetary policy will increase the odds that a larger part of the real depreciation is achieved through lower inflation rather than a nominal depreciation."

This provision is likely aimed at China, which has been accused of stimulating its economic growth by undervaluing its currency, thereby making its exports more attractive to the U.S., with which it has an enormously advantageous trade surplus.
It is curious that the IMF's prescriptions sound like the same approach it has taken toward developing nations for decades under the "Washington Consensus." By using this set of policies, critics argue, the IMF has tried to force those nations to acquiesce in free-trade "reforms" and cut back on government expenditures that benefit their populations-such as food and fuel subsidies-in exchange for Western bank loans.
IMF control over developing nations had been slipping away in recent years as they have become more determined to control their own destiny. With worsening economic conditions maybe those days are over.

WHAT IS THE REAL CAUSE OF SOARING PRICES?

If the overall effect of the crisis is to slow down the economies of the developing nations and push them back into the arms of the IMF-i.e., the U.S. and the Western banks-shouldn't we also be asking what has caused the tremendous rise in fuel and food prices in the first place? Dare we think that the price increases may have somehow been engineered to accomplish these ends?
Someone who thinks so is James Norman, author of The Oil Card: Global Economic Warfare in the 21st Century (TrineDay, 2008). Following is the publisher's description of the book:
"Challenging the conventional wisdom surrounding high oil prices, this compelling argument sheds an entirely new light on free-market industry fundamentals. By deciphering past, present, and future geopolitical events, it makes the case that oil pricing and availability have a long history of being employed as economic weapons by the United States. Despite ample world supplies and reserves, high prices are now being used to try to rein in China-a reverse of the low-price strategy used in the 1980s to deprive the Soviets of hard currency. Far from conspiracy theory, the debate notes how the U.S. has previously used the oil majors, the Saudis, and market intervention to move markets-and shows how this is happening again."
Lending credence to Norman's thesis is the fact that prices of both oil and food in the world commodity markets have risen much faster than any possible scenario would indicate that involves simple supply and demand. Yes, world petroleum utilization is up, but it has not more than doubled in the last year as has the price of oil per barrel.
This has led to widespread suspicion that prices of these vital commodities have been artificially driven up by speculators and that perhaps these speculators are seeking a refuge from the financial markets that have been shaken by the recent turmoil stemming from the collapse of U.S. mortgage lending.
Even the ever-vigilant IMF has resolved to track down the culprits who might be to blame. From a June 14 IMF statement:
"The International Monetary Fund will prepare an analysis of the real and financial factors behind the recent surge in oil and commodity prices, their volatility, and the effects on the global economy, Managing Director Dominique Strauss-Kahn said. Responding to a call by the Group of Eight (G8) major industrial nations, Strauss-Kahn said that as part of the analysis, the IMF would look into the possible role of financial market speculation in the recent price hikes."
So far so good. But then again, shouldn't it already be easy enough to tell who is meddling in the commodity markets? The answer, unfortunately, is no.
In fact, legislation passed by the U.S. Congress in 2000 brought into existence "dark pools" within these markets that allow up to a third of all buying and selling activity to remain invisible, trading that involves billions of dollars. Neither government regulators nor anyone else knows who these traders are. [5]

THE 1970s VS. TODAY

This takes us full circle, because the stagflation of the 1970s, according to the World History Encyclopedia,
"...was the result of the quadrupling of oil prices by OPEC, increases in the price of raw materials, and the lifting of Vietnam-era government-imposed price and wage controls. At the same time, the economy went into recession. In 1979 the high inflation rate was sent spiraling upward when OPEC doubled petroleum prices after the Iranian revolution. President Jimmy Carter established the Council on Wage and Price Stability, which sought voluntary cooperation from workers and manufacturers to hold down wage and price increases. The council could not control OPEC, however, and repeated oil-price hikes thwarted the council's efforts."
According to some researchers, the oil hikes of the 1970s were part of a deal the U.S. made early in the decade, whereby the profits from higher prices would 1) be reinvested by the OPEC nations in Western banks; and 2) would be used by them to buy Treasury bonds to finance the U.S.'s soaring post-Vietnam War fiscal and trade deficits.
Central to this strategy was the 1971 removal of the U.S. dollar gold peg by the Nixon administration and the cooperation of Saudi Arabia's royal family. Thus was born the era of the petrodollar, resulting in a huge expansion of the dollar as the world's reserve currency.
And, as is happening today, the oil price hikes also resulted in record profits for the American-British-Dutch oil companies, their stockholders, and their financial overseers at the big New York and London banks and investment firms. These profits also fed back into the U.S. and other Western economies but also hoarded to enhance the wealth and power of the financial controllers.
Hoarding means that these types of windfall profits tend to drive up the costs of assets like real estate, business equity, and securities but do not provide a great deal of capital investment that could produce new jobs. Working people rarely benefit.
The stagflation of the 1970s acted like a tax levied by the U.S. government and the world's financiers on the entire global population, but it was a tax that was funneled into the pockets of the already-rich. Today that is what seems to be starting again.
There is one big difference, however, between then and now. In 2008, Russia, as an increasingly-powerful oil-producing state, is also a major beneficiary of higher prices. So is Hugo Chavez's Venezuela, the only OPEC nation in the Western Hemisphere. Neither of those nations exactly sees eye-to-eye with U.S. policy makers on the future of the world.
The crisis also raises the stakes for control of Central Asia's untapped oil and natural gas reserves. This is a region where the U.S. has been trying to compete with Russia and China for influence but with little success.
So from every angle, the stagflation of 2008 seems to be making the world a more dangerous place.

Copyright 2008 by Richard C. Cook
Richard C. Cook is a former U.S. federal government analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, NASA, and the U.S. Treasury Department. His articles on economics, politics, and space policy have appeared in numerous websites and print magazines. His book on monetary reform, entitled We Hold These Truths: The Hope of Monetary Reform, will soon be published by Tendril Press. He is the author of Challenger Revealed: An Insider's Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age, called by one reviewer, "the most important spaceflight book of the last twenty years." His website is www.richardccook.com.
Comments or requests to be added to his mailing list may be sent to WhiteLightPress@gmail.com.

[1] In 2007, world GDP was $54.3 trillion. EU GDP was 16.8 trillion and U.S. GDP 13.8 trillion.
[2] 2007 GDP of Japan=$4.4T.
[3] 2007 GDP: China=$3.3T, Brazil=$1.3T, Russia=$1.3T, India=$1.1T.
[4] Richard C. Cook, "Stagflation is Here, and It is a Weapon of Mass Destruction," Global Research, August 20, 2008.
[5] Richard C. Cook, "Inflation and the New World Order," Global Research, August 3, 2008.