Tuesday, October 19, 2010

Are the conditions ripe for Stagflation? The latest breaking news on "rare earth" minerals is dog piling on the cost of producing...

     Have we moved one step closer to Stagflation?  Stagflation a term used to describe the twin problems of stagnant GDP (hence increasing/high unemployment) and inflation.  We already have the high unemployment...This is the WORST thing that can happen to an economy in the short run because it is extremely difficult to get out of.  Traditional Aggregate Demand policies tend to exaccerbate the problem. 

     In the last week I have blogged about rising grain prices which affect many parts of the food supply, the depreciating dollar which increases the prices of globally traded commodities (oil, metals, minerals, agricultural products, etc) , and now this breaking news from China:

""China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of those materials to the United States and Europe, three industry officials said on Tuesday.

 ""China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of products as diverse as cellphones, large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies. ""

This will only serve to increase the price of these minerals for the producers of the goods that use these "rare earth minerals".   All these things mentioned above increase the cost of producing a wide variety of goods.  This tends to shift the short-run Aggregate Supply curve to the left, decreasing GDP, increasing unemployment and increasing the average price level of goods---Stagflation...This is what the textbook says may happen.  I certainly hope it does not, but...

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