Stagnation plus inflation spells big trouble

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.