Stagflation is in the Air
The United States economy has steadily lost steam and appears to be stalled. Prices have shot upwards at the fastest pace in thirty years. Energy prices further threaten the equilibrium of an already shaky national platform along with unprecedented spending on the Iraq and Afghanistan fronts.
The Fed doesn’t readily admit it, but the United States has sufficient inflation from continually extending credit to the government to the tune of 16 billion monthly for the two wars the Bush Administration has been fighting. The Fed has been pumping credit into the U.S. system for the last 5 years at an unprecedented rate. The government has earmarked the maximum amount of money available for a stimulus plan. The stimulus plan is already enhancing inflation, which in turn, will further devalue the dollar and its buying power when Americans need the buying power most. Whether the stimulus spending deflects economic stagnation remains to be seen. Stagflation, a combination of stagnation and inflation threatens the job market, industry and the entire economy as higher prices and declining demand result from consumers as they cut back their spending because of higher prices and shrinking paychecks. The Fed’s situation is already compounded by the banking liquidity crisis and the mortgage crisis. Right now, about $60 billion a month is being loaned on a short-term basis to banks that qualify by having enough collateral. The U.S. government has put the burden of nurturing the economy fully on the shoulders of the Federal Reserve. High gas and food prices, the effect of the housing bust, the credit crunch and a tougher job market put more pressure on the Fed.
Nobel-prize winning economist Joseph Stiglitz stated that the war has greatly contributed to the slowdown. “To offset that depressing effect, the Fed has flooded the economy with liquidity and the regulators looked the other way when very imprudent lending was going up. We were living on borrowed money and borrowed time and eventually a day of reckoning had to come, and it has now come.” The war is touted by Stiglitz as the reason for the credit crunch that exists in the United States, since $3.3 trillion have been invested in the Iraq War alone. While this might be considered a matter of perspective to some degree, the effect of the war cannot be ruled out when weighing the factors of the U.S. economy.
The sage advice of the past has been to “start saving” to prepare for stagflation. The reality is that saving money is not a complete answer to this complex set of economic circumstances. The value of money along with the buying power of the dollar is down. Your savings are already worth less than when you socked them away.
Concern yourself with reigning in spending. The sages recommend start paying off credit card balances and other bills in the biggest chunks possible. That might be good advice for those in good financial shape. Better advice is to be sure that you are not at the mercy of electronic money, debt cards and the banking system. Start setting cash aside in the event of an emergency. Refuse to use the bank as a tool to float your money. The bank, along with reckless spending, is part of the problem. If the bank can’t charge you, they can’t bankrupt you. If you can’t make a payment, sock aside everything you can in a safe place and don’t spend it to make yourself feel better. Make plans, but don’t be willing to put yourself under the bus financially to make a creditor happy. Set money aside. The worst part of stagflation is that circumstances make money harder and harder to save. The more cash you have to call on in an emergency, the less desperate or destitute you’ll be. These are short-term plans for success in your fight against stagflation.