thevicenarian.com

Stagflation?

Posted by Tad Johnson - Feb 23rd, 2008 at 12:02

Guest post from Ryan over at ActionsTalk.com

Stagflation on the horizon?

The sub-prime mortgage mess has led to a looming recession. The combination of that looming recession and continued inflation causes an economic state called stagflation. This is a state we have not seen in the US since the 1970’s. The US Labor department reported yesterday that over the last 12 months the CPI or consumer prices have risen 4.3%.
Rising prices (inflation) + Mortgage mess (recession) = STAGFLATION

What to do…?

Nothing in the mean time. Economist agree that there are no monetary or fiscal policy actions that are considered sufficient to remedy stagflation. There is really nothing that can be done in the short-run (less than 5 years). If a restrictive monetary policy is implemented the “stagnant” part increases, (further recession) but if a fueling monetary policy is implemented the “inflation” portion increases.

How did we fix stagflation last time?

The Federal Reserve chairman at the time, Paul Volker, significantly increased interest rates (the opposite of what is occurring now) to reduce the money supply. This was called a “disinflationary” scenario. Fiscal stimuli and money supply growth combined to create a sharp economic recovery, but during that time there was a significant rise in unemployment. Volker trusted that these unemployment concerns would self correct. They did and by the early to mid 1980’s we had recovered from stagflation.