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Mario Tama/Getty ImagesBoth the money supply and federal spending have increased at breathtaking rates over the past year, unprecedented in peacetime. The policy decisions made by the Federal Reserve Board and Congress virtually assure we will enter a period of 1970s-like stagflation. The recovery, when it comes, will combine slow economic growth, unusually long un- and underemployment, stagnating real incomes, rising interest rates and inflation. There is little that policymakers, having made colossal mistakes, can do to prevent such an outcome. However, there are steps that can be taken to shorten the period of stagflation and return to an era of robust economic growth, good jobs and stable asset and consumer prices. Indeed he has been catching - catching flak, that is, from critics on left and right and over both his foreign and domestic agendas. As he approaches the six-month mark of his presidency, his job has become less glamorous and more grueling. Allies in Congress are restive and for the first time, the whiff of failures and defeats is in the air. Thus the new tone from the White House press corps, which, like animals in the wild, preys on the weak. But don't be fooled by this dark patch. Obama's long-term prospects remain bright. - Washington Times

Dominant Social Theme: Inflation is coming!

Free-Market Analysis: This is a pretty good point of view in that it corresponds to reality. However, the Washington Times being what it is, and the author being who he is (a former legal consultant to Dick Cheney) it takes thousands of words to get to the point. And the point is not too complex. Stripped of all the learned language about M1, M2, M3, money flows, policy makers and spending analyses, the article is basically proposing that the federal government is spending too much money while not allowing the marketplace to unwind its debt.

While on the one hand the article is unnecessarily prolix, on the other it is uncertain about some basic terminology. Whether the author understands the classical definition of inflation is unclear in our opinion. Inflation, as free-market thinkers understand it, is an increase in the money supply. But stagflation, as interpreted by the mainstream media, has more in common with price inflation than an expansion of the money supply.

So let's approach this term from the point of view of price inflation. We've written this very thing in numerous articles, usually with a caveat that it is easier to anticipate price inflation than to predict it. One may understand the mechanism of inflation and deflation throughout the business cycle, but the timing is a tricky business. We remember 20 years ago when we first figured out what a free-market business cycle was, we were convinced that precious metal prices were about to go up right away.

Psychologically, our recognition of the business cycle generated a belief that the cycle would turn immediately. Instead it took another decade - until around 2000 - for the cycle to start to move. But once it started to move, we were immediately and intuitively aware of its direction. Having followed it so closely, we figure, because of government interference, this cycle has another 5-10 years to go.

Conclusion: The definition of stagflation, actually is a jobless recovery, which we just wrote about yesterday. But we can't see this economy generating substantial price inflation any time soon. Jobs are still degrading at a massive rate and housing prices are still falling as well. Eventually, given the amount of money that Western governments have printed, stagflation (price inflation with a stagnant economy) is a given. But the timing is not so clear cut. It may take a while to generate. There will be plenty of pain in the meantime.