MAR 3, 2008 - Monetary Explanation of Stagflation is important reading as the year unfolds. Already it's clear that the year is unfolding as outlined in advance in my 2008 World Forecast Highlights. Monetary Explanation of Stagflation is the economist's explanation of why it's happening. Professors Robert Barsky and Lutz Kilian refute the simplistic belief that the stagflation of 1973-1975 and 1979-1982 were due to oil price shocks, instead pinning the phenomenon on monetary expansion; more specifically, to a "breakdown of the Bretton Woods system;" which is exactly what I describe in my 2008 forecast as the bacground to what's happening in the present. Now that more and more pundits are pronouncing the return of stagflation, once again there are those who blame it on $100-a-barrel oil. Once again, they're wrong. Read Monetary Explanation of Stagflation, and you'll understand why. (You'll need a current Adobe reader to read the Barsky and Kilian paper.) Meanwhile, get ready people. While the offical US statistics are talking about an average inflation rate of "only" 4.1% last year, that's based on an average that includes durable goods like computers, televisions and such that most people buy relatively rarely and by choice. The inflation rate for things we buy of necessity every day, week and month - stuff like gasoline, eggs, milk and bread - is well into double digits, over 30% in the extreme cases. If you've been reading my annual forecasts these past few years, you have known for some time now what to expect.
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