[OPE] estimating the severity and duration of a capitalist economic crisis

["Jurriaan Bendien" <adsl675281@xxxxxxxxxx>]

Subject: Kenneth Rogoff on the problem of global inflationary pressures in a speculative world

Jerry,

 

On the stagflation scenario, here's a clip from Kenneth Rogoff. I realise he is not a Marxist but he makes a perfectly valid point (however the quantitative effects and the timeframe within which these things play themselves out are crucial, and these are difficult to gauge, unless you are very knowledgeable about the data. I thought I would post it to the list, to supplement what I said before. I am sure you realise where this argument from Asia Times leads).

 

Internationalist greetings

 

Jurriaan

 

"America's inflation would be contained but for the fact that so many countries, from the Middle East to Asia, effectively tie their currencies to the dollar. Others, such as Russia and Argentina, do not literally peg to the dollar but nevertheless try to smooth movements. As a result, whenever the Fed cuts interest rates, it puts pressure on the whole "dollar bloc" to follow suit, lest their currencies appreciate as investors seek higher yields.

Looser US monetary policy has thus set the tempo for inflation in a significant chunk - perhaps as much as 60% - of the global economy. But, with most economies in the Middle East and Asia in much stronger shape than the United States and inflation already climbing sharply in most emerging-market countries, aggressive monetary stimulus is the last thing they need right now.

The European Central Bank (ECB)is staying calm for the moment, but it, too, is probably holding back on interest-rate hikes partly out of fear of driving the euro, already at record levels, even higher. And the ECB worries that if the US recession proves contagious, it may have to turn around and start slashing rates anyway.

So what happens next? If the United States tips from mild recession into deep recession, the global deflationary implications will cancel out some of the inflationary pressures the world is facing. Global commodity prices will collapse, and prices for many goods and services will stop rising so quickly as unemployment and excess capacity grow.

Of course, a US recession will also bring further Fed interest-rate cuts, which will exacerbate problems later. But inflation pressures will be even worse if the US recession remains mild and global growth remains solid. In that case, inflation could easily rise to 1980s (if not quite 1970s) levels throughout much of the world.

Until now, most investors have thought that they would rather risk high inflation for a couple of years than accept even a short and shallow recession. But they too easily forget the costs of high inflation, and how difficult it is to squeeze it out of the system. Maybe they, too, should try holding a few conferences in Zimbabwe, and get a reality check of their own."

 

Complete article http://www.atimes.com/atimes/Global_Economy/JC20Dj02.html

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