From the August 2001 issue of Entrepreneur

If you've heard the term stagflation bouncing around and spent time worrying about how this phenomenon of simultaneously high inflation and high unemployment would impact your company, stop it right now. The situation is not as dire as it may seem.

Talk of the economy sliding into stagflation has been circulating in the financial community since early this year. In March, for example, Dwight Anderson, manager of Tudor Investments' Ospraie Fund, went so far as to say he thought stagflation was actually present in some parts of the economy.

But most economists aren't so certain. "We have low growth right now, but that is transitory. It would need to go on for several years to qualify as stagflation," says John Edmunds, a finance professor at Babson College in Babson Park, Massachusetts. "We don't have high inflation right now and haven't had it since [1981]."

"Unemployment is still very low by postwar standards. So is inflation," echoes Susan Woodward, a professor at Stanford University in Stanford, California, and a former SEC chief economist. "Times aren't as good as they were a year and a half ago, but they're still very good."

But how will entrepreneurs handle stagflation if it does hit? "When there's disruption in the economic environment, smaller companies are better-suited [to handle it] and can make the decision to adjust much more quickly," says Anthony C. Warren, a professor and the director of the Farrell Center for Entrepreneurship at Penn State in University Park, Pennsylvania, and managing partner of technology investment bank Strategic Technologies LLC. "They're more flexible than large companies and can more easily cut expenditures."

The darker side for entrepreneurs lies in the area of capitalization: The current dry spell we see in investment for innovative businesses would most likely worsen in the case of stagflation. "It would be a very bad environment," says Warren. "It wouldn't be a good market for new products."

Contact Source

  • Ospraie Fund, 780 Third Ave., 42nd Fl., New York, NY 10017, (212) 602-5000