Is US Economy Heading to Stagflation?

Most college macroeconomic textbooks have all sorts of information to explain the concept of inflation or recession.  I was just explaining to son Leonard that an economy is in a constant state of change, and the Government attempts to keep some sense of control (sort of like lassoing a bull with a rope) using fiscal and monetary policies.

While I’m certainly not an esteemed economist such as Arthur Laffer or Adam Smith, all indications are the US economy is heading toward stagflation — i.e., a period of stagnant economic growth along with inflationary prices.   There are at least three easily visible factors pointing this direction:

1. Raw materials: everyone knows that the price of gasoline has increased by more than 50% over the last year, but many don’t realize that the price of other raw materials such as steel, titanium, etc., have also seen price increases of nearly 100% over the last few years.   This naturally affects the price of all capital goods, ranging from automobiles to airplanes.

2. Dollar exchange rate: the value of the US dollar versus currencies in other countries has changed substantially over the last year.  For example, 1.00 US dollar used to buy 1.15 Canadian dollars.  Today, the exchange rate is nearly 1:1.  Thus, a US citizen buying goods from Canada has seen a price increase of roughly 15%.

3. Home values: for most US citizens, the value of their home is the majority of their net worth.  Watching home values drop more than 20% over the last year — along with the drop in stock market values — consumers look at their monthly 401k and financial statements and feel poorer.  The asset base to leverage for purchases is smaller now.  This likely reduces the transactional activity in the consumer marketplace by a comparable amount.

These all provide evidence for a period of economic slowdown along with price increases.


  1. Yep, stagflation is on the way. This war in Iraq is the mirror image of the war in Vietnam, from the phoney-balony staged excuse for getting in to the horrendous drain on the U.S. economy. Back then in was called having guns AND butter and it eventually led to 20% interest rates. The only thing that surprised me is how long it took to start falling apart. I’m thankful it did, because it gave my wife and I the chance to unload our too large home and downsize to one with no mortgage and pay cash for a new smaller vehicle. This time I’ll watch the carnage from the sidelines.

  2. Interesting comments. Are you a US citizen living now in Canada?
    If you’ve read any of my other postings, you’ll find that I’m neither a warhawk or a peacenik. However, I do believe that playing “world cop” is draining on our national treasury. The US is faced with a choice of reducing the troops stationed abroad (in places such as Iraq, Germany, Japan), or becoming more imperialistic (OK, Iraq… we’re taking part of your oil proceeds to defray the cost of supporting you).

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