What ever happened to stagflation? We haven’t seen this villain since Glorya Gaynor and and the Bee Gees were topping the Billboard charts and Jimmy Carter was wearing cardigans in the Oval Office. Well, stagflation is tanned, rested and coming out of retirement.
Get ready for some nostalgia kids. Stagflation is is back starring on tonight’s episode of Welcome Back Carter. It isn’t the same old, stagflation, however. Stagflation is back with a wacky new plot twist: Unlike last time, interest rates are already low so there is no easy way to send stagflation packing.
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.
Last time we had stagflation as a house guest, mortgage rates were pushing 17 percent. Now they are around four percent and inter-bank loans are at about zero. We can’t fix stagflation by lowering interest rates this time around.
In other words, Obama took the Jimmy Carter stagflation bug and mutated it into a virulent strain that is much, much harder to cure. It may be here to stay.