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Freeman Cebu Business

Stagflation  

FULL DISCLOSURE - Fidel O. Abalos - The Freeman

The election is over. The election that was marred, as usual, by massive vote buying activities.  Some done in broad daylight, vote buying was even extended until after the winners were proclaimed as some shrewd politicians bought votes in two tranches. 

The first installments were handed over when voters went to the polls and the final tranches were paid when the results show that they won. So wily, so creative, well, in a bad way. This way, if they lose, they only spend one-half of their budgets. If they win, they pay in full and recover the entire amount plus several millions more starting right on their first day in office.

Sadly, the majority of our countrymen remain oblivious of the fact that with such devious scheme we might soon find our economy on the edge of the precipice. In the meantime, they savor the temporary relief brought about by the proceeds from the votes they sold. Once spent, they will realize that gasoline and diesel prices went up again. Certainly, they will also soon realize that the situation can go worse. That the possibility of either a recession or stagflation (a portmanteau of stagnation and inflation) isn’t remote.

Why? First and foremost, history tells us that there were three recessions that were triggered by oil crisis. In modern times (after WWII), the first to hit us was the Oil Crisis Recession in November 1973-March 1975. Lasting 16 months, it was brought about by the quadrupling of oil prices. This led to stagflation (a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high).

In the 1980s, we had the Iran/Energy Crisis Recession (July 1981-November 1982). It was caused by the regime change in Iran, the world’s fourth-largest producer of oil then. Iran’s production cuts forced oil prices to go up. Consequently, both inflation and unemployment rates went up. 

The other one happened in the 1990s. To recall, we had the Gulf War Recession (July 1990-March 1991). Lasting 13 months, this resulted in the spike in oil prices as Iraq invaded Kuwait.  As a result, there was a huge decline in manufacturing activities. Thus, the recession was felt all over the world and unemployment rate rose.

Undeniably, Russia’s invasion of Ukraine may even have worse consequences. As the world’s second largest producer and third biggest exporter (Russia) of crude oil, global consumers are feeling the pinch of the ongoing disruption in deliveries. Supposedly, sanctions on Russia will pressure Putin to withdraw from Ukraine and leave them in peace. So far, we don’t see it coming. In the meantime, though these sanctions made Russians’ lives miserable, these have made ours difficult too. 

Undeniably, a solution is available and crystal-clear, increase production output. The USA did increase its output but the OPEC member countries have a different agenda. They are so adamant and will never yield to the requests of the USA and some European countries for the immediate output augmentation. Given the fact that five of the top ten oil exporting countries in the world are OPEC members, it should have been a surefire solution. These are United Arab Emirates (1), Saudi Arabia (2), Kuwait (4), Iraq (5) and Nigeria (8). Clearly, together with the other nine members, OPEC can substantially address the ongoing output shortages.

Obviously, money is the motivation. As oil price surges, the windfall is just so irresistible. Well, just plain deviousness. 

Pundits, in fact, are now talking about stagflation. Coined in the United Kingdom during the period of inflation and unemployment in the 1960s and 1970s, it was also used in the USA in the 1970s for the same reason. 

Indeed, as oil and gas prices hit record highs, the situation is slowly becoming so similar. As military experts predict that this war can last for months or even years, the surging oil prices will remain unabated.  

Expectedly, as energy is needed to produce and transport goods, prices of basic commodities will certainly shoot up. As prices go up, workers shall demand for pay increases. Consequently, operating costs will go up and some factories may just fold up. Consequently, unemployment rate goes up and the economy shall stagnate. With the economic slowdown or stagnation and steadily high unemployment rate coinciding with rising inflation, stagflation may just obtain.

ELECTION

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