Friday, May 09, 2008

The return of stagflation

A short while ago, I alerted readers to the fact that there will be official intervention in markets in order to raise the value of the dollar. This has now been announced (see my posts titled: "The Euro, the Dollar, Bubbles and the simple fact of the oversupply of money" as well as "Further developments on the Euro").

It is now fairly clear to me that we will have a return of stagflation (combined economic stagnation and inflation) - if we are lucky only till mid-2009, if we are unlucky then till longer.

In broad terms, notwithstanding the complexity of the factors that contributed to the stagflation of the 70s, it could be argued that the Keynesianism contributed to it - and its failure to explain it or to have instruments with which to solve it led (at least partly) to the rise of monterism and to supply-side theories.

However, as the imminent bout of stagflation is actually caused by monetarist policies worldwide, it will be interesting to see what new theory emerges to account for our world economy which is massively financially over- leveraged and monetarily over-supplied .

More important, it will be interesting to see what new tools are going to be developed to deal with the situation. Sphere: Related Content

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