Share this article

print logo

STAGFLATION COULD BE CLINTON'S NEXT WORRY

Few economic terrors strike at the heart of a Democratic president like the possible return of stagflation -- an administration-destroying combination of stagnant growth and inflation.

The last Democrat to sit in the White House -- Jimmy Carter -- battled these twin evils but in the end was overpowered -- an event not lost on some of President Clinton's more seasoned policy-makers.

Inflation worries have surfaced in recent weeks while the U.S. economy is barely making headway, evidenced by last week's release of the first quarter's revised gross domestic product showing a tepid 0.9 percent annual rise.

"We're talking about moderate stagflation, not the sort that hit the country in the late 1970s, but it's becoming a concern," said David Jones of Aubrey G. Lanston and Co. Inc.

Even at moderate levels stagflation impairs the ability of the Federal Reserve to conduct a balanced monetary policy and companies to plan ahead.

The Fed is reportedly leaning toward tightening monetary policy to combat worries about inflation and the falling dollar, but analysts don't expect the central bank to act soon.

In part, this is because increasing interest rates can lead to an economic slowdown, a prospect that thrills neither the Fed nor the administration.

The president's close call last week in the House in getting his economic package passed suggests how much trouble Clinton is having learning Washington's ways and it's this perception that is causing disarray in currency markets, analysts said.

This has caused, some analysts say, a decision by investors to back away from the dollar, leading to a sharp plunge in its value, and largely unsuccessful attempts by Treasury or the Fed to stem the flow.

There even is speculation that a disagreement exists among those in the administration that would like to see a lower dollar because it helps make United States goods more competitive overseas and those who worry that it will add to inflation by making foreign goods more expensive here.

Still, stagflation may be in the works, but it's a much tamer animal than the one that stalked Jimmy Carter.

The former president suffered under the oil shock of '79 which sent prices skyward and at times reduced supplies to a trickle -- adding to inflation and shutting down Western economies.

There are no comments - be the first to comment