Will Egypt Cause Economic Doomsday?

Charlie Gasparino The Daily Beast January 31, 2011

by Charlie Gasparino Info

Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His latest book, Bought and Paid For, is about the Obama administration and Wall Street.

Will the chaos in Egypt reverberate here financially? Charlie Gasparino on how some economists fear a return of 1970s-style "stagflation," and how Chinese policy helps stoke it.

All the signs have been pointing to a robust economy in 2011, from the president's pump-priming cave on Bush-era tax cuts (as well as accompanying extension benefits) to business openness to turning cash stockpiles into expansion. The stock market has cracked the 12000 level, and Republicans have been privately worrying that, in prodding Obama into adopting more free-market principles, they inadvertently saved his presidency.

Now comes the political crisis in Egypt and you can almost feel the markets fret. Oil prices have been edging up, the markets recorded their largest decline since November, and even worse, the chatter among many economists has raised the specter of global "stagflation," the economic disorder that made the late 1970s and early 1980s among the worst years for the economy since the Great Depression.

Of course, there are many reasons to be worried about Egypt's instability aside from its economic impact. Egypt is possibly our most important Arab ally, and a friend—or at least not an enemy—one of America's bedrock partners, its next-door neighbor Israel. In recent years, Egypt has seen a rise in Islamic fundamentalism, and the crisis that has stunned Mubarak, a despot with pro-U.S. leanings, has eerie parallels with the late 1970s, and the shah of Iran. You know how that turned out.

But the economic impact of Egypt's political unrest shouldn't be underestimated—and certainly not ignored by investors and economic policymakers. The markets, of course, are always looking for reasons to trade up or trade down, and after cranking out gains over the past eight weeks, looting and rioting in the Middle East was as good as a reason as any for traders to take some profits.

Still, what happened Friday wasn't a mere hiccup for a market poised for Dow 12000 and above; rather it's the realization that a government potentially hostile to the U.S. and its interests could control the Suez Canal, a vital shipping lane for oil coming from the Middle East and to the West; it is a recalculation of the risk of severe economic turmoil if Egypt is swept into a radical Islamic frenzy and if oil prices double or even triple as a result; it's the recognition that for all the positive forces influencing the economy now, there's also a strong undercurrent of weakness, a structural imbalance that makes stagflation—where a economy suffers from both high unemployment and high inflation—a very real possibility.

There are many reasons to avoid anything to do with the 1970s—stagflation trumps them all.

Linda Davidson / The Washington Post via Getty Images; Chris Hondros / Getty Images

There are, of course, many reasons to avoid anything to do with the 1970s—bad hairstyles, platform shoes, Watergate, and Jimmy Carter's presidency, to name just a few. But for my money, stagflation trumps them all. Inflation normally occurs when economies become "overheated," i.e., too many people making money chasing too few goods and services. Prices then begin to rise, to reflect this scarcity.

• Peter Beinart: Obama’s Mideast Moment of Truth• Howard Kurtz: Al Jazeera’s Big MomentWith stagflation, inflation occurs when the economy is already weak. It begins with an exogenous event—a "price shock" that lights the inflationary fuse, and causes a weak economy to now grow weaker as businesses cut costs to remain profitable by shedding jobs. One of the few ways to deal with stagflation is to make a bad economic situation even worse and squeeze the economy even more—as former Fed Chairman Paul Volcker did during late 1970s and early 1980s when he raised interest rates and the country suffered massive unemployment. That, combined with tax cuts enacted by President Reagan, quashed inflation and restored economic growth—but only after nearly a decade of chaos.

12 January 30, 2011 | 11:07pm Twitter Email Share var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); if(OutbrainPermaLink.search(/blogs-and-stories/)>=0){ OutbrainPermaLink += "full/"; } var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Stagflation, Oil Prices, Egypt, Economy (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: AlanD2

What in the world is Gasparino talking about? Egypt is not a major oil producer, and most oil tankers - supertankers - are too large to use the Suez Canal. As for inflation, many economists such as Paul Krugman are much more worried about deflation these days. Gasparino sounds like a GOP fear monger. Does he work for Fox News?

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 3:04 am, Jan 31, 2011 Chuckv

Read the fine print at the end of the article: Charlie Gasparino is a senior correspondent for Fox Business Network. He does a lovely job of not quite misrepresenting facts to make a false point. Note the sentence: "...John Lonksi calls it a "bit of a stretch" to say the U.S. is now suffering from stagflation, since inflation has remained relatively (sic) even with the Federal Reserve aggressively printing money...." This makes it sound like, even though there is not quite stagflation now, it is just around the corner--we are almost there. But it is not a "bit of a stretch," it is downright false. Right now inflation is not "relatively" low, it is extremely low--so low that deflation is a greater danger. And the economy is growing, albeit too slowly. So we have neither "stag" nor "flation." Therefore no stagflation.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:46 am, Jan 31, 2011 AmericanPravda

At best, this article is a load of abject nonsense; at worst, this article is nothing but good old right wing fear-mongering. It's not only Gasparino's reputation at stake heere, it's also The Daily Beast's.

Flag It | Permalink 12:24 pm, Jan 31, 2011 Mauiboy

THE WRITING ON THE WALL (STREET): Hey Charlie, have you checked out the Stock Market this morning. Humming along like a finely tuned engine. Do you really think that some rioting in what is becoming a third-world country is going to derail Apple and Goggle?

Flag It | Permalink 1:57 pm, Jan 31, 2011 Wittgenstein

If Gasparino had a history of being right in his predictions, like for example, Paul Krugman, I'd be more worried. As for now, I'd just say he's here because he says well what some people want to hear.

Flag It | Permalink | Reply 9:03 am, Jan 31, 2011 YearsLaterXXI

This is not Gop or dem. or anything. it is the truth that this rocks the whole world depending on oil.Amazing how ignorant, we all are in foreign affairs, domino effects,and lack of knowledge. Oil will go up,not now not this minute,not yet.It is part of everything,and jobs & the economy,will pay the price.

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Will Egypt Cause Economic Doomsday?

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