Tuesday, April 14, 2009

Capacity Utlization and Inflation

Most Keynesian economists believe you can not have inflation in an economy without high capacity utilization and low unemployment. Stefan Karlsson explodes this myth by pointing to Zimbabwe:

Zimbabwe has had extremely high money supply growth rate while also having extremely high unemployment (60 to 80%) and extremely low capacity utilization
(20%). The result was an inflation rate of 231,000,000%.
File this fact.

Right now we are headed towards climbing capacity utilization, and eventually lower unemployment, but down the road (in a year or two) we could see declining capacity utilization, climbing unemployment AND climbing inflation, i.e. stagflation.

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