OpEdNews - Page 2 of Article: The Sad State of Our Republic

Stagflation will become a problem because lowering the interest rates will cause more marginal harm than marginal good, when used. The central bank’s power to either stimulate the economy or attempt to rein it in through the mechanism of adjusting the domestic interest rate has become ineffective. Americans are cash-strapped consumers. Americans bought fewer gifts while paying more for necessities. From Thanksgiving to Christmas, spending rose only 3.6 percent over the same period last year, the weakest performance in at least four years, according to early tallies from MasterCard Advisors, a unit of the credit card company. One-third of that increase was for gas purchases. U.S. food prices have risen this year at more than twice the rate of 2006, and at a pace not seen since 1990. The outlook isn't any better. Many economists say in 2008 the estimated price increase of about 5 percent could be part of a trend that threatens to ratchet up food costs for years. U.S. personal bankruptcy filings jumped 40 percent in 2007 because of rising mortgage payments, job losses, and other financial pressures.

Regarding the housing market crisis, mortgage rates are on the way up in spite of the fed cuts. This is because the credit crunch has banks afraid of lending and only Fanny May and Freddy Mac are writing loans.

A choice can be implemented that tends to improve growth, but does it ignite systemic inflation? A choice can be implemented that tends to fight inflation, but how badly does it impinge growth?

I predict that we’ll see stagflation in 2008. In modern times, it will be only after the central bank has used all possible tools to meet both goals, using the best quantitative measures it has at its disposal, for stagflation to occur. Major economic conditions of unusual proportion have already created near-crises on both fronts.

Stagflation will occur because the central bank has rendered itself powerless to fix either inflation or stagnation.

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