Very good question, WMP...
Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.
The concept is notable partly because, inflation and recession were regarded as mutually exclusive, and also because stagflation has generally proven to be difficult and costly to eradicate once it gets started.
Both stagnation and inflation can result from inappropriate macroeconomic policies. Central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labour markets; together, these factors can cause stagflation.
The global stagflation of the 1970s, began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.
We have the huge increase in the money supply happening as we speak. The recession will be pronounced due to the enormous deleveraging that is occurring at present. People (in USA) have seen their wealth decline. There is something like 12 million houses that have been foreclosed on; 10,000 per month (see interview on 7:30 Report last night). I believe that the physiological impact of this will be far greater than banks offering cheap money to consumers to try and kick start the economy again.
The American consumer has OD'ed on debt. The two factors that may permit stagflation to take hold are now on offer. It is a possible outcome.
Cheers, Skip
