Stagflation is a phenomenon in which production mechanisms operate more slowly than occurs in normal times. This is inextricably linked with inflationary processes, since it is the depreciation of money that stimulates the deterioration of the state of the entire system.
The meaning of this term
Stagflation is the state of the economy in which inflation develops, the level of well-being and stability in the market environment falls. There is depression and stagnation. The connection of this concept with stagnation, that is, the closure of production and the rapid increase in prices for goods and services, is traced.
Inflation and stagflation are closely related, because in a changing state of the market, many manufacturing enterprises do not risk investing in their work, because of which there is no development, and everything is in decline. The state economy is developing cyclically. Each time a new situation drives people into a stupor, tearing them out of the course of things to which they are accustomed.
Capital is already reproduced by other mechanisms. Stagflation is a condition provoked by an inadequately rapid rise in prices. Before the 60s and 70s, crises had a slightly different character. Then the cost of production decreased, but in the 70-80s of the last century the situation changed dramatically, making it even more difficult for entrepreneurs to insure their risks.
When and where did the name appear
Stagflation is a concept whose origin dates back to 1965. The first to speak was Jan MacLeod, who went down in history as a member Parliament of Britain. He mentioned this concept at a meeting of the House of Commons.
Stagflation is a pun in his performance. He simply combined in one term stagnation and inflation, focusing on the analogy with a sick child born of this union. It sounded like a witty diagnosis. Well, not to lose your temper and to maintain a sense of humor in a critical situation is a feature of a really good politician.
When the phenomenon began to appear for the first time
Stagflation is characterized by stagnation in production, which, in turn, is due to the cyclical development of economic processes. This can be clearly seen by delving into the history of the 70s of the last century. Until that time, crises occurred precisely because of the rising cost of goods.
However, the years 1974-1975 turned people's ideas about these processes. Stagflation is a state of the economy in which prices are rising. In the United States, an increase of 10% was observed. When a recession was planned in the future, approximately the same thing happened.
Stagflation is in most cases a consequence of the imposition of expansive governance within the state, of increased demand. Events occur that reduce the economic potential in production. At the supply level, violations are triggered by the terrible business environment.
Small opportunities
Stagflation is characterized by a low level of maneuverability, which the organization can count on in order to save its money and continue to earn profit. It’s hard to avoid bankruptcy.
Going into the open float to the market during the inflation period is the same as standing on board a ship, which during a storm throws waves from one side to the other. And it is not known after all whether it will be possible to safely reach the shore.
Stagflation is characterized by the fear of entrepreneurs for their capital and reputation. After all, even without wanting it, you can be left without money and let down customers, which they, of course, will not forget.People at this time and so do not have very many opportunities to acquire new expensive things, so the decline occurs both on the demand side and on the supply side.
Even basic necessities become much more difficult to acquire, not to mention second-priority goods. Of course, when it comes to flour or sugar, there is nowhere to go. But no one has canceled the harassment from competitors. Even in the supply of such products, the company may become impoverished due to the fact that it will be outstripped by an opponent standing on its feet more firmly.
Everyone suffers
Of course, people will not stop eating, although they may deny themselves something. For example, chocolate manufacturing can be oppressed by cheaper cookies, which people will switch to, saving money and denying themselves this pleasure in favor of something simpler.
We still have to pay for communications, electricity, public transport and medicines. But the people will squeeze their expenses as best they can, from which, of course, sellers will suffer. And due to the fact that entrepreneurs do not want to take risks and take steps that can lead them to collapse, a person who previously had more choices will suffer.
In the market, it is convenient for the buyer to choose among many competing firms. But if those, in turn, do not feel protected, they will simply consider that the game is not worth the candle and it’s better not to get into competition. The only way to play it safe is to lay superprofits, which, of course, negatively affects attractiveness in the eyes of the consumer. National currency acquires reduced value. So the situation in this case can be called more than oppressive for all parties.
Precedents in History
Looking for examples of stagflation, we can turn to the historical background of the following events:
- The crisis of 1991-1996 in Russia. Prices rose more than ten times, GDP fell to an unacceptable level - three times.
- Another example is Ukraine in 2008-2009. The state of its economy was also not encouraging, because against the backdrop of falling GDP, prices for goods and services were rising, and the currency was getting cheaper.
Recent manifestations
Ukraine was distinguished by the fact that in the first quarter of 2008 inflation rates reached 9.7% in fact, while the government wanted to hide it and disclosed other data - 0.1%. Of course, in such an unfavorable environment, production immediately collapsed. A year ago, the rate of price increase already exceeded 12.9%.
The rating group Standard & Poor’s made its assessment and determined that in mid-2008, the Ukrainian authorities managed to accumulate external debt of $ 35.7 billion, which amounted to 30% of all government obligations. Many banks have nothing to brag about, because they have seen gaps in the negative direction for short-term liquidity.
There is a great dependence on customer deposits, which, of course, are not received due to the precarious state of the economy. For liquid assets, the share was only 12% of the total number of assets. This is completely insufficient to create a progressively developed economy. However, in the last few months we can see market stabilization.
