Stagnation plus inflation spells big trouble
By
Milt Neidenberg
Published Sep 23, 2005 9:47 PM
Bye, bye Goldilocks economy!
Katrina’s hurricane winds and floods in the Gulf region have swept
away Wall Street’s fairy tale that the economy was just right—not
too hot, not too cold. Now looming over the economic landscape are storm clouds
of stagnation and inflation and the possibility of a recession.
Following
the breaks in the levees, the Sept. 1 New York Times described New Orleans and
the surrounding area in an article entitled “A Distribution System Brought
to Its Knees.”
The article stated that the area “is a major
hub supplying energy products to other parts of the country. It also serves as a
transportation center handling farm pro ducts and other commodities delivered on
the Mississippi River ... almost half of the country’s oil refinery
capacity is concentrated on the Gulf Coast. Katrina idled 90
percent.”
The damage and destruction caused by Katrina will create
widespread pockets of stagnation and by recent estimates will cost over $200
billion—adding more debt to the $400 billion budget deficit. This will
ratchet up the cost of borrowing. Interest rates will rise along with price
inflation.
Oil, which remains over $60 a barrel, is based on monopoly
pricing and profits set by four giant U.S. corporations. The spike in prices has
already had a widespread inflationary effect on many commodities and industries.
Oil fuels the engine of the global empire. From Europe to Asia, sticker
shock has begun to shrink the Gross Domestic Product—the value of all
goods and services produced.
In the U.S., industries impacted by
spiraling oil prices—steel, aluminum, glass, rubber, plastics and
chemicals, among others—are either raising prices, laying off workers, or
both.
Two major airlines, Northwest and Delta, have petitioned for
bankruptcy. Giant auto corporations Ford, General Motors and Chrysler are
saddled with trying to sell gas guzzlers and are deep in debt. The rush to buy
gold—a store of value during tempestuous times—has pushed the price
to more than $450 an ounce.
Consumer confidence in September was the
lowest since 1992, plunging 14 percent from August. The index is down 20 percent
since July, the largest decline in points over a two-month period since
comparable records began in 1978. Consumer spending constitutes two-thirds of
the GDP.
Inflation, from the gas pumps to the supermarket, has taken its
toll on the income of workers, especially from the oppressed nationalities.
Poverty is on the rise. The number of workers without jobs for more than
six months has more than doubled over the last three years and now comprises
more than 20 percent of those unemployed. Not since the 1930s has the rate been
so high for so long. Black workers and other people of color, women, youth and
immigrants have borne the greatest hardships of this crisis. Many are so
discouraged they no longer look for work. Stagflation will create more
unemployment and misery.
Hocus-pocus monetary policy
The
Federal Reserve Board (FRB) met on Sept. 20 to apply monetary machinations to
grapple with the intractable issue of stagflation.
Wall Street analysts
were buzzing over two questions. Would the FRB raise interest rates and, most
important, what would be the Fed’s message concerning inflation despite
the downturn in economic growth?
The FRB did announce a rise in interest
rates, by a quarter-point, for the 11th consecutive time since June 2004. This
increase in borrowing costs to 3.75 percent will further shrink the growth rate
of the GDP.
Although Federal Reserve head Alan Greenspan, the master of
manipulation, usually can come up with language to soothe Wall Street, the FRB
finds itself between a rock and a hard place.
Following the end of the
2001 recession, the FRB kept interest rates at a low 1 percent for almost three
years to stimulate the economy. It unleashed a monetary policy that led to an
unprecedented increase in cheap and accessible paper money.
The housing
boom took off like a rocket shot into space. Thirty-year mortgage rates were so
low that millions of home buyers were drawn into the market. The overall result
was a nationwide binge of borrowing and spending—speculation.
Now
it’s payback time.
The capitalist cycle of expansion is over. The
housing boom has reached its peak and consumer/buyers are buried in debt, having
spent more than they earn. When the housing bubble breaks, the precipitous
decline in spending on construction and on all products that accompany home
buying could send this economy reeling towards an economic crisis.
The
current trade deficit and government/consumer debt have reached all-time highs.
On Sept. 16, the National Debt Clock was racing upward at a rate of $1.66
billion a day, to a total just short of $8 TRILLION.
That’s minus
the cost of Katrina.
The day Bush was inaugurated in 2000, the national
debt was $5.7 trillion and there was a federal government budget surplus.
When Katrina exposed the government’s criminal negligence, there
was a national outburst of outrage against the Bush administration, which is on
the defensive for the moment. An economy that is riddled with stagflation,
compounded by imperialist wars going badly in Iraq and Afghanistan, has weakened
the empire of high finance.
It is certain that Wall Street and “Cor
porate America” will counter with further attacks on workers and the
oppressed nationalities.
In “Hurricane Katrina: The Black
Nation’s 9/11,” Saladin Muhammad, chair person of Black Workers for
Justice and a co-convener of the Million Worker March Movement, said the Katrina
catastrophe “is directly the result of a profit-driven system of
capitalist exploitation reinforced by national oppression of African-American
people ... .”
He called for “a representative body that acts
as a kind of provisional government to deal with questions regarding the future
of their communities.”
As a step in that direction, he stated that
it would “require the organization, politics, and leadership of the
African-American liberation movement ... to help unite a broad, multi-national,
multi racial and international campaign for social justice and
reconstruction.”
The class struggle is heating up.
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