Morgan Stanley: It's Starting To Look A Lot Like Stagflation


Photo: Morgan Stanley

While the world worries about inflation or deflation, Morgan Stanley believe their is another specter out there ready to haunt markets: stagflation.Their opinion is that right now, the global monetary environment looks a lot like the 1970s, where high levels of liquidity forced OPEC to raise oil prices causing high inflation and low growth in the global economy.

Their findings also show great differences between the two time periods, including the flexibility of oil prices, and high U.S. unemployment.

But what’s more worrying are the similarities. With quantitative easing 2 in place, global monetary policy is extremely loose, driving inflation, especially in emerging markets. If oil prices were to spike to catch up the result could be stagflation, as high oil prices limit global growth.

Nevertheless, the comparison is interesting and worth evaluating.

Inflation grew through the 1960s, the gold standard came to an end in 1971, and the Fed pursued an expansionist monetary policy.

Monetary policy was incredibly loose around the world, which created massive booms that drove inflation.

Oil production had remained high even though prices were low. Eventually, resources were exhausted, so OPEC raised the price. And the Fed overstimulated in response, driving inflation higher.

Right now, the global money supply is and has been extremely high, similar to the period before 1970. QE2 opens up further expansion, and other countries may follow.

And already, hints of QE2 are driving inflation expectations higher, and the oil price with it.

But what component of stagflation should you be most worried about?

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