Monday, June 11, 2012

Stagflation is Now Here

Actually, stagflation has been here for some time. As anyone who shops has noticed, the past three years have seen some dramatic increases in the prices of foods and other goods, even as the sizes have shrunk.

Anyway, the story is from Fox Business News:
Stagflation is one of the worst economic conditions a country can be in, and the United States just entered it.

It has actually been responsible for revolutions and uprisings in developed countries around the world. Most recently Greece, Spain and Portugal are experiencing severe doses of this dreaded economic condition. It is extraordinarily difficult to work through and often destroys wealth for generations.

Stagflation is simply defined by high unemployment, slow economic growth and high inflation. It makes inflationary and deflationary periods look like a walk in the park. Stagflation usually results in very long, severe recessions.

The best and most effective way to recover from stagflation is for the government to lower rates drastically. The last time the U.S. was in stagflation -- in the late 1970s -- that is precisely how we recovered and prospered. However, it is crucial to understand that we are not in a position to do that today since rates are already at historically low levels. This is a cataclysmic problem. How we got here is debatable, but fixing the situation will be difficult.
The author discusses the real rate of unemployment and the slow economic growth, and then notes:
Finally, prices are rising all around the country. The unprecedented printing of money through quantitative easing programs has been responsible for a majority of this sharp price rise. It is well known that the CPI grossly underestimates the actual increase in the cost of living. Prices on all goods and services are rising drastically. If you were to remove all the manipulation and biases that the government uses in its inflation calculation you will see that inflation is running at about 7%.
Actually, the real way to have dealt with this problem would be to figure out a way to lower energy costs. While the collapse of the housing market was bad, I would argue that the sudden and persistent increase in energy costs have been the largest drag on the economy. It hasn't helped that the current administration had been so hostile to the coal and oil industries. Obama may not have been the cause of the Great Recession, but he certainly hasn't done anything useful to help get us out either, but has instead followed policies intended to keep the nation (and the rest of the world) down. For that he should rightly be condemned.

In related news, the net worth of the average American family declined nearly 40% between 2007 and 2010. And to make things even better, the government will be taking more of your income the beginning of next year. According to the latter story, "next year's potential tax hike would increase federal revenues by 16 percent, according to CBO."

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