[OPE] Der Spiegel on the political fallout of stagflation

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Fri Jul 11 2008 - 21:43:27 EDT

Der Spiegel, which called the G8 summit "hot air", notes wrily that "Of course, interest rates cannot be raised and lowered at the same time":

"Stagflation confronts the central banks, in particular, with a problem that is very difficult to resolve. To reestablish price stability, they should in fact raise interest rates, because in addition to distorting price structures on the markets, inflation is especially hard on those with low incomes. They are forced to spend most of their money, and yet rising prices mean that they can afford less and less. Besides, their meager savings are also worth less and less. On the other hand, central banks should lower interest rates to bolster an ailing economy. Of course, interest rates cannot be raised and lowered at the same time." http://www.spiegel.de/international/business/0,1518,563499-2,00.html

What are the political implications?

"In addition to economic risks, the scenario is rife with political uncertainty. How will the electorate react when the economy tips and prices explode? (...) Those in power sense the potential impact that the accumulated wrath of voters would have on politicians in Germany's ruling coalition parties, the CDU and SPD. Voters would punish politicians for rising unemployment figures and the government's failure to live up to its promise to balance the national budget within a few years. Some politicians would benefit, namely those who claim that the crisis can be confronted with simple formulas, like higher wages and pensions, as well as lower energy prices for low-wage earners. If a party like the Left Party can garner double-digit approval ratings in all opinion polls in relatively good times, how much more popular will it become when times get worse?" http://www.spiegel.de/international/business/0,1518,563499,00.html

As yet, the problems in Europe, America, Japan and Australasia are relatively modest compared to developing countries:

"In Vietnam, only recently considered to be a South Asian tiger economy, the inflation rate is currently 25 percent. In June, the population had to spend 74 percent more on food than it did just one year ago. Workers are striking for higher wages in many parts of the country. Diesel prices in Bangladesh have risen by one-third to about 80 US cents per liter; the price of natural gas has risen by two-thirds. Of the country's population of 145 million, 58 million must make ends meet with less than $1 per day. In Thailand, protesters blockaded streets because of the devaluation of the baht, which is painfully inflating import prices. Fears are increasing of a renewed Asian crisis. In India, protests are becoming ever more frequent. Train lines are being blocked. Schools are being closed. And last week millions of truck drivers went on strike after the government in New Delhi reduced fuel subsidies, a new policy which affects not only diesel prices, but also those for cooking oil. Fast growing economic power India is battling against an inflation rate of 11.6 percent. In Pakistan that rate is 19.3 percent, 20.2 percent in Iran, and Russia, Serbia and Bulgaria are registering rates of about 15 percent. In 50 other counties, the rate is greater than 10 percent. If Germany, for example, were to experience the 30 percent drop in consumer buying power now being seen in Ethiopia or Venezuela, it would mean the recipients of the country’s highest benefit for the long-term unemployed, currently at €378 ($594) per month, would see their purchasing power slashed to €264 within one year." http://www.spiegel.de/international/world/0,1518,564223,00.html

As the neo-liberal era draws to a close, a political time-bomb is ticking away. In the end, it is not possible to secure price stability without heavy controls on capital flows, and it is not possible to maintain political stability without heavy restrictions on civil freedoms. Necessarily, that means that any kind of "liberality" drops out of neo-liberalism. Give it another ten years, and it's likely to have become an "archaic" expression.


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