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Sound the Alarm, Stagflation is Coming

By: Steve Johnson

8/7/2008 - 38 Comments

As economic conditions continue to worsen, the likelihood of stagflation is increasing.

Wikipedia’s definition of Stagflation;

“Stagflation is a macroeconomics term used to describe a period of inflation combined with stagnation (that is, slow economic growth and rising unemployment), generally including recession.“

“Stagflation came to be recognized as a very serious macroeconomic problem in the 1970s, when it afflicted many countries in the developed and developing world.”

“Stagflation becomes a dilemma for monetary policy when policies usually used to increase economic growth will further increase runaway inflation while policies used to fight inflation will further the decline of an already-declining economy”

Stagflation is not an easy problem to solve because it is not an easy problem to create. Stagflation is created by years of bad monetary policy decisions which create boom and bust economy cycles, like the housing bubble that began its bust last year. The boom cycle lasted over seven years, from 2000-2007.  A housing bust is perhaps one of the largest problems for an economy to face because of the tremendous amount of money that a housing boom creates.  Japan’s economy is still recovering, almost 20 years later, from its housing market bust in the 90’s. 

There are a lot of reasons why the current economic decline could be much worse than it was in the 70’s, where stagflation was a major problem for almost a decade. America has been spending 120% of its income for nearly 30 years.  The correction will likely force us to live on 50-70% of our income for the next decade – while paying for the debts of the past. Many economists still believe America can continue to boom after a short recession because we are the leading economic of the world and have a tremendous amount of wealth.  This is true, but America has become a nation of consumers, which no longer produce nearly as much as we consumer. Consumers depend on credit to continue consuming. With the housing market bust, the consumers are bust, which means America will no longer be the economic engine for growth that it has been. The global economic will continue to expand - leaving America behind as it did when Japan’s economy declined in the 90’s. 

Stagflation is coming and it’s going to bring a lot more economic decline. The politicians, Federal Reserve and the US treasury cannot do much about it.  Most of their solutions will only make the problem worse.  The questions is; What can you do?

A Train Is Coming, Get Off The Tracks

If someone told you a train is coming and you where on a train track, would you get off the tracks or would you look down the tracks and say - I cannot see the train, so I’m not getting off.  That is the situation we are in today. The media, administration and Wall Street financial firms are sending mixed signals. Who do you trust?

If you make the wrong decision and stay on the tracks for too long, it could be a disaster. Stagflation is not fun and is not merciful. It could take your job and drastically reduce your purchasing power. Stagflation is not fair either. Many of the people that helped create the problems will get off free and clear, yet many people that were just minding their own business will get clobbered. The politicians will be overwhelmed with victims asking for help, forcing them to make more decisions that will likely fix one problem only to create several others – as they try to socialized the losses and tax the rich. The rich will find ways to dodge the policy changes because they will be the most informed, while the middle class takes the brunt of the burden.

Here is a short list of things to do to begin preparing for stagflation;

  • Sell your toys, pay off loans
  • Sell your house or pay it off
  • If you have any money, consider moving it to commodities
  • Cut your spending, so that you could live on half your income (budget)
  • Plant a garden, learn to grow and store some small food items
  • Get another job or find another income stream

My Best Advice

My best advice is to stay informed. The new administration will likely create new policies and regulations that will create advantages for some and disadvantages for others.  Information about the actions of the government and Federal Reserve will become extremely valuable. As inflation grows – daily changed with respect to price controls, interest rates, wage freezes (which just began in California for all state workers) and new restrictions and regulations will change how businesses operate. Most of the burden of new regulations and prices controls will be on large businesses because they control the majority of product volume. Personal finance information about banking, interest rates, budgeting, ideas for saving money, getting credit and lending will continue to be in high demand. This is one of the primary reasons I run this blog, to stay informed.

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