NationStates Jolt Archive

I was wondering if there are any economists on the board, or people who actually have a good deal of real experience in the business world and the field of economics who could answer some questions.

Just a note, I do NOT want wild, baseless speculation from people who have no real experience whatsoever, or from people with no facts to back up their opinions, and I do not want this thread to degenerate into a left vs right debate or pro-bush vs anti-bush orsomehow get pnumed into a religion debate or whatever. If you're going to post any nonsense like that, get out of this thread and do it somewhere else, preferrably in your own thread.

So here are my questions: After Katrina has hit, and with these huge leaps in oil prices, I'm hearing all sorts of words being thrown around - words like inflation, stagflation, recession, depression, and so on, and while I understand what each of these words means on its own, I'm having trouble putting them into the context of the situation. I also have a limited knowledge of what has been going on economically over the past few years: Ever since 2000, the US economy has been doing poorly, and as a result, the economy up here in Canada wasn't the best in 2000-2002 either, but ever since 2003, it has turned around completely and is picking up some steam, contrary to the US which seems to still be declining, albeit more slowly. This huge push in oil prices, however, sounds like it will do quite a bit of harm to both of our economies, but my questions are: How much harm exactly will it do? In the short term? In the long term? Will the rise in oil prices cause out-of-control stagflation, crippling the economy à la great depression, or will it simply cause a sharp increase in inflation and result in a recession, or will it ultimately do nothing at all to the economy? If there is a depression or a recession, will that help close the gap between rich and poor in the country in the long term, or widen it? Will it push the US more towards true capitalism, or will it continue even faster on its current path toward a corporatist aristocracy? Will the economy just slump a little bit, then pick back up again, without touching the status quo? What is likely to befall the majority of middle-class citizens? Upper class? Lower class? Does what happens ultimately depend on the greed of the oil companies and the prices they decide to sell at, or will it depend more on consumers' attitudes, or will it be affected by some other factors in the marketplace?

I suppose the biggest question of all of those is what will happen to both of our economies in the long term, and what direction will they head in, as far as Capitalism vs Corporatist Aristocracy vs Socialism?

In order to maintain inflation at around 2%, there will need to be dramatic reduction in the growth of the supply of money in order to offset the inflationary effect of the rise in oil prices. This will already have partly been achieved by Greenspan's 10 interest rate rises over the last year, from 1% in June 2004 to 3.5% today. This will already have sent debt and mortgage repayments soaring by 350%.

If that is not enough then the federal government could have a fiscal contraction in the next budget, either raising taxes or reducing spending. Or there could simply be more interest rate rises. By any method, the monetary contraction is going to hurt, and inflation will most likey rise before falling back to a normal rate of 2%.

Inflation for the whole of 2005 could possibly rise as high as 7%. This would be the highest since 1981, when there was the last great rise in oil prices. My prediction is 4-7% for the year. Because it will take time for a monetary contraction to take affect, inflation will stay at the 4-7% rate for another two years before it finally falls back to 2% in 2008.

Growth before the Katrina disaster was going at an annual rate of about 3.4%. The rest of this year will see a dramatic slowdown caused by the monetary contraction needed to contain inflation. My prediction for real GDP growth in 2005 for the US is 2.6%. This will fall even lower to 1.2% in 2006, 1.0% in 2007, and 0.8% in 2008, and then finally picking up again in 2009 to 2.9%.

During this recession, unemployment would double from its present rate of 5% to 10% at the end of 2008. People would be sick of the Bush administration and would hopefully vote for a democrat in 2008, who would take the country down a more left-wing liberal path with higher taxes and more spending on healthcare and education. That would be a move away from a corporatist aristocracy.

I personally feel that this hurricane will have only a moderately short term effect on the economy. The main problem here is the price of oil, and as long as we keep the SPR open, reopen infrastructure and keep imported supplies flowing, the commoditiy will normalize itself.

We'll see a sizable spike in unemployment, followed by a recovery as the demand for reconstruction of the city grows. Following that, commerce will slowly revive as people return and the region will undergo an overall recovery, although its pace will be heavily dependent on oil prices.

The inflation situation is still alright, and it seems like it will be in the high 2 to 3% range. The Federal Reserve should probably pause on the 9/20 meeting to be on the safe side, but shouldn't cut rates. That would do nothing but stoke inflation and make the situation worse. They should begin tightening again when there are no signs of a serious slowdown.

Eurosceptics, I would have to disagree with the severity of inflation and GDP slowdown. One of the things keeping inflation tame is that many industries aren't passing on costs to consumers, although your situation is possible if oil prices aren't normalized during the next few months. The real GDP will probably be 3.9-4.3% in this quarter (there will be a roughly 2% bonus due to inventories), followed by 1.9-2.4% in the fourth. Growth will pick up somewhat in probably the first quarter and will recover to normal by the second or third. Unemployment will recover faster, altough the region hit will have considerably slower recovery.

Again, this is all based on the idea that an oil shock will not be prolonged. There won't be a recession unless something goes wrong. Companies have too much cash, and consumers are still confident.

In order to maintain inflation at around 2%, there will need to be dramatic reduction in the growth of the supply of money in order to offset the inflationary effect of the rise in oil prices. This will already have partly been achieved by Greenspan's 10 interest rate rises over the last year, from 1% in June 2004 to 3.5% today. This will already have sent debt and mortgage repayments soaring by 350%.

Only for those who have a floating rate tied to the Fed.


If that is not enough then the federal government could have a fiscal contraction in the next budget, either raising taxes or reducing spending. Or there could simply be more interest rate rises. By any method, the monetary contraction is going to hurt, and inflation will most likey rise before falling back to a normal rate of 2%.


The government can soak up all the money it wants to, it won't change the increased oil prices or the subsequent rise in the price of goods. So I don't think there is a whole lot they can do.


During this recession, unemployment would double from its present rate of 5% to 10% at the end of 2008. People would be sick of the Bush administration and would hopefully vote for a democrat in 2008, who would take the country down a more left-wing liberal path with higher taxes and more spending on healthcare and education. That would be a move away from a corporatist aristocracy.

10%? No way.

Corporatist aristocracy?

Personally, I don't think it will have a traumatic long-term effect on the economy. I can see the present admin. using it as an excuse to drill the north slope though.