War or Peace, Barbarism or Hope: War Threatens World with Stagflation

Yves here. The odds of stagflation already looked high before the immediate effects of war (shutdown of Black Sea shipping hurting wheat and fertilizer transport) plus the sanctions row, both formal sanctions and self sanctioning. As we’ve said repeatedly, higher energy prices cycle through to all products.

Stagflation hurts investment two ways. The first is that high interest rates mean lower net present values when you discount future cash flows. The result is only projects with near-term, high paybacks look good. The other is that businesses become uncertain of their results because items on their balance sheet inflate at different rates. When investors start worrying about FIFO versus LIFO accounting for inventories, you know inflation is a  problem.

And even though everyone but owners of hard assets suffer, the ones who are hit worst are the poor, both the less well off in rich countries and substantial parts of the population in emerging economies.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website

The spectre of ‘stagflation’ threatens the world once again. This time, the risk is the direct consequence of political provocations and war, and not simply due to inexorable economic forces.


Stagflation is a composite word implying inflation with stagnation. Stagnation refers to weak, ‘near zero’ growth, inevitably worsening unemployment. Inflation refers to price increases – not high prices, as often implied.

The term ‘stagflation’ was supposedly first used in 1965 by Iain Macleod, then UK Conservative Party economic spokesperson. He later became Chancellor of the Exchequer, or finance minister, in 1970 for little over a month, the shortest tenure in modern times.

In 1965, he told the UK Parliament that amid “swiftly rising” incomes and “completely stagnant” production, “we now have the worst of both worlds. We have a sort of stagflation situation”.

The term caught on in the 1970s, when high inflation and unemployment ended an economic era dubbed the ‘Golden Age of capitalism’ describing the post-World War Two (WW2) boom.

Normally, in a recession, the inflation rate – i.e., the overall rate at which prices increase – falls. As unemployment rises, wages come under pressure, consumers and businesses spend less, reducing demand for goods and services, slowing price rises.

Similarly, when the economy booms, the labour market tightens, pushing up wages, in turn passed on to consumers via increasing prices. Thus, inflation rises and unemployment falls during a boom.

However, stagflation poses a dilemma for central banks. Normally, when economies stall, central banks try to stimulate growth by cutting interest rates, encouraging more borrowing, and thus spending.

But that could also fuel further price rises and higher inflation. On the other hand, if they raise interest rates to check inflation, growth may slow even more, further worsening unemployment.

1970s’ Stagflation

The growth of world trade after WW2 increased demand for the US dollar, the de facto world currency under the 1944 Bretton Woods (BW) international monetary agreement. The US financed much post-WW2 reconstruction to broaden its ‘Free World’ sphere of influence as the Cold War began.

Following post-WW2 reconstruction, demand for the greenback was met by greater US imports paid for with US dollars. As foreign central banks increasingly accumulated dollar reserves, flows were reversed in the 1960s, with net resources into rather than out of the US.

During the 1960s, US economic growth was increasingly sustained by government military and social expenditure. Spending increased for both ‘defence’, especially the Vietnam War, and social programmes, e.g., President Lyndon B. Johnson’s ‘war on poverty’ and ‘Great Society’.

As LBJ was reluctant to acknowledge the rising costs of the Vietnam War, it was difficult to raise taxes to pay for his ‘swords and ploughshares’ spending. Instead, spending was financed by government debt, from selling US Treasury bonds. Thus, the world financed US government spending, including the war.

By January 1967, Johnson was under pressure to cut the growing budget deficit. But it took a year and a half for the US Congress to pass his new budget with tax increases. When finally passed in mid-1968, US federal debt had grown even more as spending for both ‘guns and butter’ did not decline.

US monetary policy was obligingly expansionary. Unsurprisingly, inflation shot up from 1.1% during 1960-64 to 4.3% in 1965-70. Higher inflation also eroded US competitiveness, further worsening its balance of payments deficit.

Inflation also undermined US ability to honour its BW commitment to maintain full convertibility to gold at US$35 per ounce. This obligation did not go unnoticed by foreign governments and currency speculators.

As inflation rose in the late 1960s, US dollars were increasingly converted to gold. In August 1971, US President Richard M. Nixon ended the exchange of dollars for gold by foreign central banks, effectively violating its BW commitment.

A last-ditch attempt to salvage the international monetary system – through the short-lived Smithsonian Agreement – failed soon after. By 1973, the post-WW2 BW international monetary arrangements were effectively done with.

Commodity Supply Disruptions

Oil exporting, European and other countries which held reserves in US dollars suddenly found their assets worth much less. With Venezuela, the Middle East-led Organization of Petroleum Exporting Countries (OPEC) reacted by dropping their earlier willingness to keep oil prices low.

In October 1973, ‘nationalist’ Saudi monarch Faisal embargoed oil exports to nations supporting Israel soon after President Anwar Sadat’s attempted reprisal following Egypt’s defeat by Israel in 1970. The oil price almost quadrupled – from US$3 to nearly US$12 per barrel when the embargo ended in March 1974.

This steep oil price rise was paralleled by great increases in other commodity prices during 1973-74. Besides petroleum, other primary commodity prices more than doubled between mid-1972 and mid-1974. Meanwhile, the prices of some commodities – such as sugar and urea – rose more than five-fold.

Commodity supply shocks and higher commodity prices increased production costs, consumer prices and unemployment. As rising consumer prices triggered demands for higher wages, these in turn increased consumer prices. Thus, wage-price spirals accelerated price increases and inflation.

The 1979 Iranian revolution triggered a second oil price shock. The resulting ‘great inflation’ saw US prices rise over 14% in 1980. In the UK – then deemed the ‘sick man of Europe’ – inflation averaged 12% a year during 1973-75, peaking at 24% in 1975, while inflation in West Germany and Switzerland exceeded 5%.

In the 1960s, unemployment in the seven major industrial countries – Canada, France, West Germany, Italy, Japan, the UK and the US – rarely exceeded 3.25%. But in the 1970s, the unemployment rate never fell below that. By mid-1982, it rose to 8%, exacerbated by interest rate hikes, ostensibly to fight inflation.

The 1970s’ growth slowdowns – with rising unemployment and inflation – in major industrial economies caught many economists off-guard. Economic thinking then presumed inflation and unemployment were alternatives.

The Phillips Curve implied low unemployment came at the cost of higher inflation, and vice versa. This crude and static caricature of Keynesian economics enabled a major assault on its influence. The assault on development economics was collateral damage in this ‘counter-revolution’.

Peace Is Our Best Option

In October 2021, the International Monetary Fund, the European Central Bank, the US Fed and other such institutions believed the factors driving inflation were transitory. None of these authorities saw an urgent need for interest rate hikes.

But in the last month, the war in Ukraine and sanctions against Russia have driven up the prices of commodities such as wheat and oil. This will exacerbate rising inflation in much of the developed world. The threat of stagflation is undoubtedly more real now than six months ago.

By October 2021, Google searches for ‘stagflation’ hit their highest level since 2008. Mention of stagflation in online news stories surged to more than 4,000 weekly by mid-March, up from slightly more than 200 at the start of the year.

This time, ‘stagflation’ is the direct consequence of political choices, especially for war, not unavoidable economic trends. Developing countries are fast learning where they really stand in this unequal world of endless war, e.g., from the European treatment of Ukrainian refugees.

Peace is therefore imperative. The alternative is the barbarism of conflict among big powers in which most of us have no vested interests. Instead, our shared hope lies in ensuring peace, to focus instead on the common challenges facing humanity.

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  1. Susan the other

    “This time stagflation is the direct consequence of political choices, especially for war, not avoidable economic trends.” I’d say it has always been because of political choices. The results arrive a bit faster now since we have come to live in a world that runs on “financial time.” But the causes and consequences are same old. But now we are stuck between a rock and a hard place. We can’t stimulate our economies in the same old industrial way. Now we need to create industries that are environmentally viable. It’s a sea change. I’m surprised Chowdhury and Sundaram didn’t point out that in the missing years from Reagan to Joe (about 35 years), the price of a house went from $50 per sf to $1,000 per sf. The cost of a building lot went from less than $40K to over $4 million. Or medical services. Or a college education. And so on. There have been pockets of staggering price acceleration. Which are extremely hard to justify except that they have been allowed to appreciate to benefit those in power. As does war. To make Peace the new imperative of the 21st century, we actually need governments that can govern. That are able to make political choices not by bribery or default, but by effective legislation. The United States, the biggest warmonger of them all, is poorly prepared to govern for peace and equality, let alone environmental protection. It is a very discouraging time to be living in.

    1. sadie the cat


      “There have been pockets of staggering price acceleration. Which are extremely hard to justify except that they have been allowed to appreciate to benefit those in power.”

      They gouge because they can.

  2. Eclair

    Few people talk about what we ‘Western’ capitalists have done to our Planet in the past four hundred years. To the Western Hemisphere in particular. There are writings of the first Europeans to hit North America; tales of how the sky was dark with flocks of birds rising from waters rich with fish. Forests of enormous trees, stretching for hundreds of miles. And, the midlands; endless vistas of man-high grasses that sustained herds of millions of bison. Riches, everywhere one looked. Food on the hoof, beavers for hats, acres to be put to the plow, trees to be converted to board feet and ship masts. (And, this is before we discovered silver, gold and oil!) All for no money down, grab it and it’s yours.

    The first invaders believed (or promulgated the belief ) that the land was empty, free for the taking. More recent research indicates that much of the territory had been carefully farmed. Husbanded. But the Eurotrash exploited it with a vengeance; clear-cutting, extraction, mass killings. Because it was free and abundant and the party would never end. As it had ended for so many in the European lands, with pogroms, famine (for the unfortunates), witch-hunts. That land was worn out from supporting too many humans and it had all been privatized. The losers sailed West.

    I reviewed the Club of Rome’s Limits to Growth the other day. Again. Most humans have this propensity to extract and consume all available resources. Then spit out the undigestible stuff. Bluntly, we eat everything in sight, then we excrete and poison our neighborhood.

    Resources are no longer abundant, so they command a higher price. Most of the land has been enclosed, privatized; water is next. Employment is no longer available to anyone with a strong body, and ax and a shovel. Plus, in the US, GDP growth has been, not in the productive sector but in the FIRE sector. We don’t make stuff, we create money. Or the illusion of money.

    There is another way. Not a new way; Indigenous peoples have been living this way for millennia. You take only what you need to survive; you leave enough behind, seeds, plants, trees, fish, bison, for regeneration. The meaning of life is not to amass the most money, but to insure that our family, our community, our patch of land, are all healthy and content.

    We’re sick, our planet is sick, the bees and butterflies are dying. ‘Stagflation’ is the symptom of our fatal disease.

    1. Avalon Sparks

      This little essay is so well written and thought out, and it’s also scary because it’s so true.

    2. seenopandemichearnopandemic

      Eclair : what a wonderful (but sad!) paragraph.

      Can you recommend any book that studies this abundance, richness of land when the Europeans arrived to the Americas ?

    3. .human

      The Lower Hudson River was known as one of the richest tidal fishing grounds of the world by the first Europeans here.

      Up until the mid nineteenth century sturgeon were still so plentiful that they were known as Hudson River beef. The Fulton Fish Market’s slogan is still “Meat Without Feet.”

    4. sadie the cat

      Beautifully written. I’ve often thought that if we had learned from Native Americans, instead of destroying their cultures, we would not have the environmental crisis we have today.

      “The meaning of life is not to amass the most money, but to insure that our family, our community, our patch of land, are all healthy and content.” To this, I would just add “other species”.

      Thank you.

    5. cobo

      You are right on. And we have plenty of people who can be put to work to clean up, replant and rebuild this land with exactly the philosophy you suggest. However, breaking through the sound barrier of constant hype to consume, hype to hate and fear, fear, fear – the only way the right story gets told is when it’s told in deceit by the same forces that brought us to this and have every intention to carry on.

    6. Skunk

      Well said, Eclair. The passenger pigeon could serve as an apt symbol of this destructive approach to resource management.

      Typically, the hunger to consume is portrayed as human nature, and therefore as inevitable. It’s not. Just as you’ve said, many peoples of the past have stewarded their resources in a sensible and sustainable way. Over-consuming is a choice, not a necessity.

    7. Wukchumni

      The Wukchumni tribe was here for around 3,000 years and after all that time they managed to have 2,000 members representing their clan.

      We would be disappointed in growth like that, adding another human bean statistically every year and a half.

    8. René

      Excelente!!…el hiperconsumismo y el desmedido estractivismo rompen el equilibrio hombre- naturaleza, la población del planeta se ha duplicado en 60 años pero el índice de consumo percápita de energía y agua es bastante desigual en los continentes y zonas geográficas, la industrialización ha descuidado el manejo responsable de los residuos y contaminantes que esa actividad genera, los ciudadanos de Tokio y Ciudad México exhiben avanzados smart phones y cada mañana revisan las alarmas de contaminación del aire que respiran…restaurar el equilibrio del entorno requiere accionar muchas variables de forma simultánea a nivel global, esto requiere concenso y capital pero primero…requiere unidad de liderazgo mundial, retrasar ese enfoque y accionar responsable nos acerca al punto de no retorno en calentamiento global

    1. Yves Smith Post author

      Right, where his goal was to crush worker wages. Oh, and per Warren Mosler, inflation had already broken. Oil prices started to fall in 1979 v Volcker started his “rates to the moon” experiment in 1980.

  3. Brick

    Nouriel Roubini in his article “The Looming Stagflationary Debt Crisis” for Project Syndicate last year talked about supply shocks caused by:
    1) Renewed protectionism;(Biden supply chain policy)
    2) Demographic aging in advanced and emerging economies;
    3) Immigration restrictions in advanced economies; (Brexit as an example)
    4) The reshoring of manufacturing to high-cost regions; (Trump Policies for example)
    5) The balkanization of global supply chains;
    While I would not agree with all parts of the article, it seems likely that both the pandemic and the war in the Ukraine are even more supply shocks in a long list since the financial crisis. I think we need to start thinking about the Ukraine war as a symptom of the last throws of the current globalisation model.

    In a recent report the Qatar national bank sees the reverse of globalisation undermining just-in-time manufacturing, prompting an agenda of protectionism, supply-chain onshoring food security and more closed border for migration flows causing stagflation for a very long time.

    What replaces globalisation is hard to see. Maybe it will be the concept of “weaponized interdependence” coined by Henry Farrell and Abraham Newman. Michael O’Sullivan in his book The Levelling suggests the world will cleave into “Leveller” countries that hew to rights and freedoms, and “Leviathan” ones that are content with state-managed growth and fewer liberties.

    Perhaps this about the end of Neoliberal globalisation where risks are diverted away from companies and the wealthy and toward workers and citizens. The alternative maybe a sort of grassroots globalisation where rules and agreements are done by individual parties rather than through big firms and politicians. I see it already starting with small internet importers become responsible for the welfare of producers and making sure the distribution of wealth is a little fairer.


    1. redleg

      Step one is something that folks like Roubini conveniently overlook- breaking the monopolies and monopsonies that directly contribute to (if not cause) the current inflation problem.

  4. Jeremy Grimm

    I am troubled by this reuse of the construct stagflation to describe the economic stagnation and inflation promised for our future. It is a nice construct, but it seems all too easy to make facile comparisons between now and the 1970s and in doing so reach for the same bag of tricks used to deal with the economic situation in the 1970s. The present situation is very different. Labor, an important player in the 1970s drama, is largely off the board. Petroleum is only one among many products growing scarce and more expensive. Unlike in the 1970s, the inexhaustible resources of that time have been increasingly depleted or dismantled — like rare earth extraction in the u.s. As redleg points out in a comment above, monopolies and monopsonies have consolidated beyond the levels of the 1970s and can claim greater markups as they squeeze the economy, stoking inflation. Further, u.s. production has been dismantled and shipped across the oceans, while recent actions by the u.s. government have weakened the dollar. To add insult to injury the FIRE sector recently helped itself to a giant windfall of FED and Treasury money and driven up the prices for housing and rents. The supply chains are their own can of worms greatly complicating the present stagflation. The contrasts between the present stagflation and that of the 1970s far exceed the comparisons. I fear the government wise men will view 2022 stagflation as little different from 1970s stagflation and attempt to use the same tools and approaches they used to deal with the 1970s stagflation — to potentially disastrous effect.

  5. Canadian Canuck

    We would never be in this situation if our elite kept the money honest, that is interest rates at or slightly above inflation.

  6. VietnamVet

    Brandon let the cat out of the bag. The Russia Ukraine War is really about who controls Eurasia’s resources and the future of Germany (the EU) with the China Russia Axis. The exploitation of earth’s resources cannot end. When it does, the carousal stops dead. Germany to survive as is must access Russian energy, goods and raw commodities.

    The rational approach would be to recognize the partition of East from West and establish a DMZ North and South on the Dnieper River. Except the USA is the depleted, poor, sick part of the world. The digital financialization of Wall Street crashes without the resources and workers to support the 640 trillion-dollar notational value of its derivative contracts. The net worth of the USA is more than $270 trillion. The FED’s total assets are $9 trillion. A Depression is deflationary. If there are no food, shelter or fuel, they are priceless.

  7. Sound of the Suburbs

    Before the new liberal order there was an old liberal order.

    We stepped onto an old path that still leads to the same place.
    1920s/2000s – neoclassical economics, high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase
    1929/2008 – Wall Street crash
    1930s/2010s – Global recession, currency wars, trade wars, austerity, rising nationalism and extremism
    1940s – World war.
    We forgot we had been down that path before.

    Everything is progressing nicely and we are approaching the final destination.
    This is what it’s supposed to be like.
    Right wing populist leaders are what we should be expecting at this stage and it keeps on getting worse.

    Things do tend to fall apart at the seams when using neoclassical economics.
    Neoclassical economics is a pseudo economics; it’s more about hiding the discoveries of the classical economists than telling you how an economy actually works.

    I remember now, it was Keynesian capitalism that won the battle of ideas against Russian Communism.
    These liberal phases never end well.

    Did you notice the neoliberal ideology is a new ideology wrapped around old economics that has still got the same problems it’s always had?
    I am one of the very few that has noticed.

    1. Sound of the Suburbs

      Did you notice the neoliberal ideology is a new ideology wrapped around old economics that has still got the same problems it’s always had?

      Why do they only worry about public debt?
      Not considering private debt is the Achilles’ heel of neoclassical economics.

      The economics of globalisation has always had an Achilles’ heel.
      The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics.
      Not considering private debt is the Achilles’ heel of neoclassical economics.

      What could possibly go wrong?
      The inevitable.

      1929 and 2008 stick out like sore thumbs.
      At 18 mins.

      In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
      It’s that neoclassical economics they use Ma’am, it doesn’t consider private debt.

      Neoclassical economics is now global.
      What could possibly go wrong?
      The inevitable.

      At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
      No one realises the problems that are building up in the economy as they use an economics that doesn’t look at private debt, neoclassical economics.
      1929 – US
      1991 – Japan
      2008 – US, UK and Euro-zone
      The PBoC saw the Chinese financial crisis coming by looking at the private debt-to-GDP ratio and you can too by looking at the chart above.
      The Chinese were lucky; it was very late in the day.
      The Chinese had done the same thing as everyone else, but worked out what the problem was before the financial crisis.

      “That’s handy Harry” the black swans.
      Set flight path for private debt, they’ll never see us coming.
      For the first time ever, the crafty old black swans were foiled by the PBoC who did look at private debt.

  8. Brick

    Maybe the title of this article should be really be Ukraine war threatens Stagflation and war on the US. When people struggle to find the money to eat then they might be a little unhappy with those who they perceive to have created the conditions for their struggle. When it becomes personal then perhaps people will get serious about peace.

    Saheer Ghazzaoui, a 24-year-old graphic designer in Beirut, Lebanon says “We struggle to get gas, and we’re already paying so much for food, all our salaries are going just to the necessities, and sometimes it’s not even enough”.

    From his job as a Cairo doorman, Mahmoud Farag earns 1,500 Egyptian pounds ($95) each month but it’s no longer enough to adequately feed his family of five.

    “We are nearing the month of Ramadan and are worried about price increases,” said Mohamed Ali, a 42-year-old Iraqi day laborer living in Baghdad. “There is an increase in most food prices, especially cooking oil.”

    Ordinary working people who may in the near future think that attacking the US in retaliation for their families demise is not a bad idea. The Egyptian pound dropped 14% against the dollar after Russia’s invasion of Ukraine and Egyptian authorities have requested the International Monetary Fund’s (IMF) support. Protests over the price of bread prefigured the 2011 Arab Spring movement that toppled dictators in Tunisia, Egypt, Yemen and Libya and the World Bank warns that soaring food prices could trigger social unrest in North Africa and the Middle East.

    Maybe thinking about your family in the cross hairs rather than a remote Ukrainian might make you persuade your leaders and news media to focus.


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