Stagflation is essentially a transition stage from inflationary recession into hyperinflation. It is a middle ground characterized by halting economic activities. Without proper and correct monetary policies in place, this critical transitional stage of the crisis will grow into a monster hyperinflationary depression that could bring down the entire U.S. economy. The United States is not yet in hyperinflationary depression but is already mired in inflationary recession. There are indicators that the economy is slowly easing into another stagflation.
Stagflation was recognized as an economic condition during the 1970’s inflationary crisis. It was considered as the plateau of economic growth which could lead in worsening crisis or economic recovery. In a stagflating economy, productive activities will grind to a halt while inflation accelerates and unemployment soars. This means the economy will not grow but prices of basic commodities and services are accelerating upward. There will be a significant reduction in demand which is debilitating for industries that fuel the economy. Meanwhile, because money supply is abundant, the prices of the remaining products in market will soar thus negating the value of the available money at the hands of the consumers.
Debates are raging on how to curb stagflation. However, economic stagnation characterized by spiraling inflationary pressures could be a way of the market to correct itself. Essentially, the market will try to purge the economy of excessive money supply to regain the real value of the currency. This natural social purgation could restore the purchasing power of consumers thus fueling another economic growth. Monetary policies therefore should conform to the hidden hand of the market. The dynamics of capitalist society points to the natural tendency of periodic contraction or financial crisis followed by a period of growth. If monetary policies follow this dynamic, the U.S. economy will be on the road to recovery at a much faster rate.
Unfortunately, current monetary policies of the U.S. Federal Reserve and the Treasury Department tend to go against the natural dynamics of free market capitalism. Specifically, in an effort to counteract the financial crisis, the Fed depressed interest rates at 0%. The administration also bought toxic assets, held equities in untenable companies, and bailed out irresponsible financial institutions. To fund all these, the Fed initially printed $1 trillion of fresh currencies. It is also poised to print more paper money to pump up the economy. Essentially, the Fed and the economic managers are fueling inflation and worsening the slide of the economy into stagflation. Americans may wake up one day sniffing the air of hyperinflation.
If this happens, the toxicity of the U.S. economy will be complete. Hyperinflation will set in. When this happens, the entire lifetime savings of American people could be wiped out in a matter of weeks or days. The economic Armageddon of America could happen if the production of paper money out of thin air will not stop. The American people therefore could experience the pain of hyperinflationary depression that has hit Germany in the 30’s and is hitting Zimbabwe today.
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