Stagflation - What is
Stagflation?
[Updated: Dec. 27, 2008]
Stagflation is a painful combination of high unemployment
coupled with extremely high inflation. The term is a composite of
two words - stagnant and inflation. In short, stagflation is a
declining economy with high inflation.
When the words economic
depression are used, they usually denote an economy that is
shrinking rather than growing and the culprit is usually assumed to
be deflation.
But with stagflation the
economy sinks into an extremely depressed state with very high
levels of unemployment, business failures and personal bankruptcies
while prices continue to rise at a double digit rate.
Stagflation
is Painful!
The bottom line here is that
stagflation is terribly painful. Jobs are lost and
hard to find, wages fall while the price of everything keeps going
up and up. Very few people's incomes will rise as fast as prices. As
a result, virtually everyone suffers a drastic decline in their standard of
living.
For the first half of 2009
prices will fall as we're in the midst of a deflationary cycle. But
if the government over-stimulates the economy (which seems more than
likely), inflation will rear it's ugly head sometime around
mid-year.
How bad will the inflation
get? Inflation is fueled by two factors. First you have debt. The
more debt there is, the higher the inflation will soar.
Second, any expansion in the
amount of cash in circulation will also stoke the fires of
inflation. And given the sad fact that virtually every sector of the
U.S. economy is mired in record debt and all the extra cash the
government is printing up to stimulate the economy, should inflation
get started it could quickly get out of control.
It's like a man sitting in a
room where all the furniture is soaked with gasoline. It only takes
one spark and everything goes up in a mighty conflagration.
Stagflation
is incurable
The problem with stagflation
is that there is no cure. The government usually tries to cool the
fires of inflation by raising interest rates and slowing the economy
down. But with the economy already depressed and unemployment near
record levels - raising interest rates is no longer an option.
On the other hand you have the
usual medicine for a depression - lowering interest rates to
stimulate the economy out of it's doldrums. Do that and the
inflation rate will soar and become super-painful hyperinflation.
Once an economy tumbles into
stagflation, it's extremely difficult for the government to find a
way out. There is no easy cure for stagflation.
The good news is that the
chaotic years ahead will produce amazingly financial opportunities.
Huge disasters inevitably create huge opportunities. You don't have
to suffer like all the rest.
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