Stagflation is when the prices of goods and services rise while the economy stagnates or shrinks. This results in higher unemployment and lower levels of production. Depression, on the other hand, is a prolonged period of economic decline. It is characterized by falling prices, high unemployment, and low production levels.
While both stagflation and depression can cause hardship, they differ in terms of their impact on the economy. Stagflation results in higher prices but does not necessarily lead to widespread economic decline. Depression, however, is associated with a significant decrease in economic activity. As a result, depression is generally considered to be more severe than stagflation.
Characteristics of Stagflation
- Stagflation is characterized by price increases for products in the economy, soaring unemployment levels with a high population of eligible workers, and lingering quarters of economic stagnation/decline.
- Countries experiencing Stagflation often see their citizens become impoverished due to a loss of purchasing power.
- The stock markets become distorted, and investors look for sectors that can store value. Share prices are not at their actual value causing erratic behavior from investors.
- The production centers in the economy cannot afford to expand, limiting the country’s goods.
- There will be a devaluation process in the economy with investors seeking foreign currency because of its stability. Consumers and producers begin to prefer alternative currencies which devalue the local money.
- Prices continue to rise however living standards decrease.
Characteristics of a depression
- This period represents a significant downturn in the business cycle of any economy.
- Standard features include a sharp decline in economic activity that lasts for successive quarters.
- During the depression, there was high unemployment in the country.
- Many citizens lose their jobs, leading to high poverty and homelessness. Consumers often cannot afford rent, with landlords rising prices to match inflation while employers cannot afford to raise salaries.
- With the economy in decline, there are often increased personal and business bankruptcy rates. Consumers and businesses cannot afford loans; therefore, they fall into debt.
- Investors rush to pull their funds from the stock markets leading to massive declines in share prices. This loss of value leads to decapitalization in the business industry and significant reductions in international trade.
- The period is particularly severe for the economy with similar characteristics of a long-lasting recession.
- Depression causes a reduction in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Stagflation vs recession differences
- Stagflation represents a period of poor economic performance. It generally lasts about ten years, and during Stagflation, there can be periods of recession. The stagnant economic growth, rapid inflation, and high unemployment conditions within the economy make life hard for citizens.
- A recession defines a period of a significant and broad decline in economic activity. It usually lasts for between six months – one year. A country that has an economy whose GDP declines for two successive quarters is said to be in a recession.
- Supply shocks cause prices to rise in all sectors meaning the fiscal policy is required to decrease the soaring money supply in the economy. Supply shocks often cause Stagflation in fundamental sectors of the economy. These shocks cause the entire economy to suffer.
- Recessions often occur in all types of economies. This phenomenon can also happen in the most advanced economies. Economies that experience cycles of expansion will often begin to contract. Financial bubbles exist with periods of high performance followed by tightened government spending through fiscal austerity policies.
- Stagflation is not a common problem. The U.S. recently experienced this in the 1970s.
- Recessions are far more common than periods of Stagflation. The U.S. economy has experienced dozens of recessions since 1945. It is normal to experience one recession every decade.
Stagflation vs depression similarities
- Stagflation is an economic period where prices rise due to inflation, high unemployment, and an underperforming economy. It can last up to 10 years, with consumers afraid to reinvest money into the declining economy.
- Depression is a significant downturn in business. The country’s citizens often experience high levels of homelessness due to personal and business bankruptcy.
- The economic activity in the country will continue to decline, bringing high unemployment and poverty rates.
- Potential Causes
- Bottlenecks in the production supply often cause Stagflation. Critical raw materials becoming scarce can lead to fundamental sectors collapsing. Sectors like labor and energy can trigger sharp increases in products overnight. An example of this includes the OPEC embargo on the U.S. in the 1970s that led to severe product shortages.
- Depressions are often caused by periods of high economic performance. When the economy does well, it often cannot sustain this, and any lasting drop in performance is then felt by the populace who enjoyed a high standard of living. The government will then often compound this problem by introducing austerity measures.
Stagflation typically lasts over a decade. Depressions will often not last longer than one year.
Stagflation 1970s vs Stagflation 2022
In the 1970s, the U.S. faced a period of Stagflation that was put into place by an oil embargo placed on the country by the Middle Eastern countries. This supply shock caused fuel scarcity in the country, leading to high inflation and low productivity. The government moved to introduce fiscal measures to stabilize the inflation that led to decreased economic spending. The reduced money supply led to less capital circulating, affecting the country’s industry.
Conversely, the economic situation in 2022 was mainly caused by the Covid 19 pandemic. With the global economy unable to trade effectively, prices have begun to soar. Many countries experienced periods of recession that caused high inflation and economic stagnation. The U.S. economy is still not considered to be fully in Stagflation.
Who benefits from depression?
Businesses that sell cheap entertainment and products. Consumers suffering from the misery of economic depression often turn to alcohol and gambling.
Loan sharks can also benefit from depression. With less money circulating in the economy, businesses and consumers can turn to loan sharks to access capital to help them get by.
Who benefits from Stagflation?
During Stagflation, investors who have invested in value stocks, gold, and silver, cryptocurrency often see their investments appreciate. This is due to Stagflation often being caused by currency devaluation.