Are we heading for stagflation? I am confused with the level of economy.?

Question

In my country, I can see the cost of living is increasing and unemployment at the same time. But the funny thing is there is a lot of property projects going on.. Why? please explain..

Answer 1

Property projects (construction) are hard to arrest once the ground is turned. Too much money is already sunk into the project and the carrying costs (interest expense) of just holding onto the raw land and awaiting a turnaround make it prohibitive and it is actually more wise to continue building even though there may not be present demand for the property. Also, some properties can take over a year to build and much can change in that time, good or bad.

Now for your question, the concern is that the increasing prices of energy are starting to adhere to all other prices in the economy. The only thing that is remaining unaffected is the prices of bonds. Bonds are still selling at really low rates despite the fed's attempt to push up interest rates by continually raising the fed funds rate, as they will do again at the next FOMC.

But, what does it mean for the question about stagflation. Inflation is definitely going up and the recent GDP summary for second quarter was a low 2.5 percent or so. Not good at all. Then when you combine all this together with expectations for real housing price declines, an event that has never occurred in our country's history, you have to realize that the strength of our economic engine will be tested sorely.

Too bad we are leaking money through a sieve for all of our heroic endeavors elsewhere, but you didn't ask about that.

Answer 2

It will take more than that to produce stagflation. As for being confused, welcome to economics.

Property projects are real estate, with emphasis on the word real. It is something tangilble to put resources into. That happens for two general reasons: (1) people can't trust putting their money into financial instruments, and (2) the resources will have economic utility--rented or sold to people who like that kind of property.

People sometimes gripe at rich people and their rich houses. But those places took a lot of masons, carpenters, plumbers, painters, etc. The wages for the assembly was one part, but part of the cost of the materials was for wages as well--someone cut those stones, molded and fired and stacked and transported the bricks, felled the trees, trimmed the trees, transported the logs, cut the logs into boards and timbers, made the nails (mining and refining the metals), etc. That rich house paid a lot of workers in a lot of places. If you are worried about stagflation, don't worry when you see building going on because that is part of what keeps things from growing stagnant. Worry when there are no property projects.

Answer 3

I can't tell where your country is.

Stagflation is the result of an expansion of the money supply which is going into consumption instead of production. Productivity creates jobs and products, giving people money to spend and goods to spend their money on. Consumption of imported goods using borrowed money destroys domestic jobs and bids up the price of imported goods.

"Property projects" are probably consumptive not productive. You probably didn't need them. During Japan's recent depression, the Japanese government tried to "stimulate" the economy by spending money on roads and bridges which were not needed. As a result much of Japan is now over-paved but this did not save the business that Japan lost to China, the Philipines, and Vietnam as a result of higher cost of doing business; in fact it made the problem worse by diverting resources from efficiency and modernization to useless make-work.

Frederic Bastiat wrote the classic counterexample of why "economic stimulation" does not work. A boy breaks the baker's window. The baker pays the glazier to fix it. The glazier takes the money and buys goods and services from other villagers including the baker. They spend their profits on other people's goods and services. Everybody is better off! Why not just go down the street and break all the windows in town?

The answer is that apart from being patently absurd (yet most people can not see this), the resources were diverted away from other potential and more profitable uses. The baker could have used the money to fix the window to do something that would have made his business more efficient or more productive. That "something" might have best occurred some time in the future, in which case his best option would be to save the money for future needs.

Answer 4

Stagflation is possible as are all the other combination of economic models. It is not a certainty. In fact I think stagflation is less likely than other problems. Our biggest issue is the baby boom and their retirement. We need a a huge reallocation of resources to handle the aging of such a large portion of the population. The affect of this reallocation is more likely to be a contraction of gdp with inflation. Worse than stagflation in some respects but caused by factors never before encountered.