First we had 'stagflation'... now we have 'stagdeflation'

'Stagflation' is an economic term which came to prominence in the 1970s. It exists when we have stagnation (little or no economic growth and high and rising unemployment) along with rising inflation. Put basically, stagflation occurs when the economy isn't growing but prices are. One way stagflation could occur would be an increase in the price of oil in an oil-importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable - causing firms to lay off workers. This happened to a great extent during the 1970s, when world oil prices rose dramatically during the the world oil crisis.

However, an economist has now coined a new phrase 'stagdeflation' for us to concern ourselves with. It comes from Nouriel Roubini (or 'Dr. Doom', as he has become known), pictured above, a professor of economics at New York University. He believes stagdeflation will, in six months, become the main worry for economic policymakers worldwide. Stagdeflation exists when we have low growth or recession along with falling inflation rates.

Why should we heed what Roubini says? Well, his predictions about the current global crisis have been uncannily correct. For example, he said in August 2006, "A housing hard landing will lead to a sharp and severe recession. It may also lead to a banking and financial crisis that may be more acute – and cause a more severe credit crunch – than the Savings and Loan crisis of the 1980s and early 1990s that led to the 1990-1991 recession". We will examine his forecasts further at a later date. He believes stagdeflation is happening already. The US recession is leading to deflation in areas where supply vastly exceeds demand (housing, consumer durables, motor vehicles, etc.). The unemployment rate is up sharply and commodity prices are down sharply - about 30% (from their July peak) in the last three months and, he believes, they are likely to fall much more in the next few months as the advanced economies' recession goes global. It will be interesting to see how his predictions pan out in 2009.

New York Times profile of Roubini, 17 August 2008
Roubini on the financial crisis, 15 July 2008, Bloomberg TV