The Dangers of Stagflation

Stagflation is an economic condition, where we have high unemployment, and high inflation. Simply meaning, prices rise rapidly, whilst earnings remain flat.

An economy that suffers stagflation is essentially going nowhere, whilst earnings are eaten away by inflation. This may occur in some countries, with a weak currency dependent on importing essential goods, eg. Food, and further borrowing eats away the value of their currency.

Living costs rise, and the majority of the population end up becoming poorer as inflation eats up their spending power. The main danger of stagflation is that the economy has bottomed out, but is going nowhere. Inflation kicks in, and like a terminally ill patient who is slowly dying, their condition worsens in degrees.

Compared to economic conditions in late 2008, many Economists may agree that stagflation is a sign the economy has stopped falling. But after trillions of dollars have been spent on a “stimulus” package, leading to stagflation. New stimulus packages may have to be created, to avoid years of decline, and impoverishment of more citizens.

Most traditional economic methods have been used to kick start the economy again. And we may have to start creating New Economic solutions, because previous tried and tested economic solutions have failed. How the US was able to get out a cycle of Stagflation in the 1970’s was simply by implementing “Voodoo” Economics during the Reagan years. Reducing Tax rates, and cutting down on Government spending.

This time around, it may not work. Most Governments have already lowered interest rates to all time lows, cut taxes and are cutting government spending, except on projects relating to any “New Deals.” Governments particularly the US Government have already borrowed heavily and currently have the third highest debt- GDP ratio, leaving less scope for borrowing then before February 2009, meaning some taxes may have to be increased, rather then decreased.

If Economists are right, then the economic slide has been slowed down, and our Governments may have to come up with alternative ways to find trillions of dollars more, to really stop a continuous economic slide. Otherwise we face increasing wealth loss, through inflation and higher prices and are entering a road that leads to ruin.

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