A New Era of Stagflation is Upon Us

Over the last couple of weeks it's become clear that we are entering a new period of staglation, that horrible condition of low growth and high inflation that characterized much of the 70s.

Now, many of you will point to the government's numbers and say that inflation isn't that bad. But, the cost of purchasing real products and services has increase dramatically over the last five years while most salaries have remained stagnant. Companies still pass on salary increases of 3% while healthcare costs increase by 7-12% per year alone. Clearly, the average paycheck isn't going as far.

Normally, prices increase when the economy is doing well. People earn more, spend more, and this drives up the prices for goods and services. But that's not what's happening today. Instead our costs are being driven up by soaring energy costs as well as an aging population that is driving up healthcare. The collapse of the dollar only adds to inflation by increasing the price of good purchased from overseas.

At the same time, employers can't raise salaries because of stiff competition from China, India, and other foreign countries.

The results, which we are seeing the quarterly profit reports of companies like GM, Citicorp, etc. is falling profits for companies and less disposable income for employees.

Can stagflation be beaten? Yes, but not without some structural changes to the economy. Healthcare costs have to be contained or they will continue to eat up a bigger and bigger share of our nation's output. And, we must begin to wean ourselves off oil and find other alternatives that provide reliable, inexpensive sources of energy. Lastly, we must work through the consequences of one of the largest housing bubbles in the nation's history, a painful and potentially long process.

We've become accustomed to the stock market rebounding, to things getting better. But in an era of stagflation, things might get much worse before they get better.

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