stagflation definition

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Is the U.S. Stagflation Nightmare on its Way Back?

Stagflation is an economic phenomenon so terrifying economists previously thought of it as only theory that could never materialize.

Then the 1970s came with wage and price controls, an oil embargo, and one of the worst economies since the Great Depression.

Now the roots of stagflation are creeping into the U.S. economy once again.

So how does stagflation occur? More importantly - can we avoid it?

Let's take a look.

What is Stagflation?

Stagflation exists, like it did in the 1970s, when an economy experiences slow growth, high unemployment and high inflation.

This is a nightmare scenario where consumers have less and less money to spend, the money they do have is less valuable, and there is no hope for economic growth.

Keynesian economists who adhere to the economic concept of the Phillips curve previously thought stagflation was impossible. The Philips curve shows the inverse relationship between unemployment and inflation, suggesting that when unemployment is low inflation is high and vice-versa. It denies stagflation by making high unemployment and high inflation mutually exclusive.

After the 1970s, many scholars adjusted their thinking.

"The belief that you can't have inflation and high unemployment is nonsense; we had 25% inflation in the U.K. in 1975, in the middle of a recession," said Money Morning Global Investment Strategist Martin Hutchinson.

Stagflation not only hit Europe, but the U.S. as well.

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Threat of Stagflation Looms as Prices Rise Despite Bad Economy

Few are willing to acknowledge the threat of stagflation, but reports showing inflation rising more quickly than expected - even as growth is slowing - indicate that this scourge of the 1970s may be stalking the U.S. economy.

Every economic report nudges the United States closer to the definition of stagflation - a condition marked by slow economic growth, high unemployment, and soaring prices.

Although many economists believe the sluggish economy will moderate inflation, that's not what happened in the 1970s.

"The belief that you can't have inflation and high unemployment is nonsense; we had 25% inflation in the U.K. in 1975, in the middle of a recession," said Money Morning Global Investment Strategist Martin Hutchinson.

Hutchinson has repeatedly warned Money Morning readers that the U.S. Federal Reserve's easy money policies would lead to inflation without fostering economic growth.

In the past couple of months, Hutchinson's fears have been realized.

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Two Easy Ways to Save Your Wealth From 1970s-Style Stagflation

The year was 1973.

I was just a toddler, so I couldn't fully appreciate the next-generation Camaro that had just come out or the release of the new Pontiac Firebird Formula.

But of course, very few remember 1973 as the year of the Firebird or Camaro. That's because something else was brewing that would push the U.S. economy off a cliff.

An organization that most Americans had not yet heard of called the Organization of Petroleum Exporting Countries (OPEC) was about to flex some muscle, and punish the U.S. economy.

OPEC Tries to Get Revenge on America

In 1973, the U.S. government re-supplied the Israeli military during the Yom Kippur war. The decision-makers at OPEC didn't like that one bit. So they decided to get even.

As payback, they significantly cut back the flow of oil to the United States.

This cutback in oil production from OPEC lasted until March of 1974. This, along with other factors, helped to slow down our economic growth while inflation soared. Up until that point, economists had said "high prices" and "sluggish growth" were nearly impossible.

But there it was: a new phenomenon known as stagflation.

With oil prices rising, corporations had to pay more to transport their goods. They had to raise prices to cover transportation costs. Suddenly everything Americans bought cost more − practically overnight.

The economy went south. Corporate profits slowed, and stocks went into a two-year bear market. Companies also had massive layoffs, and unemployment rose to 8.8%.

Meanwhile, the new fiat dollar slumped in value.

All this happened just because some oil bigwigs decided to decrease our oil supply. After all, prices only rise either because demand increases or the supply decreases (or both). In this case, it was the decreased oil supply.

These problems persisted for quite some time, too. You see, even though the oil embargo was over in March of 1974, gas prices continued to soar until March of 1981. In today's dollars, the peak price was equivalent to $3.41.

Back in the 1970s there wasn't much the average person could do to fend off the effects of stagflation on their personal finances. Americans either had to sit in cash or watch their stock portfolios bleed money.

Same Stagflation, Different Market

Today's markets are shockingly similar to the 1970's stagflation. We have the same sluggish growth, and the same rising prices.


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