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What is stagflation? What is the cure for stagflation?

Please click the cover to see excerpts from the book FREE MONEY

             Stagflation is a portmanteau word, a combination of the words "stagnation" and " inflation."
             Stagnation usually is felt to be synonymous with recession. Inflation usually means prices rise (as measured by the Consumer Price Index) or the value of money falls, compared with the value of goods, by an amount considered excessive. Neither of these words has a rock-solid definition, and it is not unusual for the federal government to declare recessions, only to issue "corrections" months after the fact.
             The Fed tries to keep what it defines as inflation in the 2% - 3% range. The fundamental belief is a "little" inflation is economically beneficial, while a lot of inflation, and any deflation, hurt the economy.
             Clearly, determining when stagflation begins or ends is subjective and measured by arbitrary definitions. Nevertheless, stagflation is one of the most feared economic situations.
             Why? Because the Federal Reserve Board's primary inflation fighting tool, raising interest rates, is believed to exacerbate stagnation. And what the Fed believes is it's primary stagnation-fighting tool, lowering interest rates, will exacerbate inflation.
             Thus, the Fed believes it is caught in a dilemma. It's most important tool, cannot be used both ways. Imagine people caught on a burning ship, and their only life-saving tool is a fire hose. If they don't use it, they burn. If they do use it, they drown.
             I said the Fed believes it is caught in a dilemma. In fact, there is no dilemma. The reason can be found in history.
             Contrary to popular wisdom, history shows there is no correlation between interest rates and GDP growth. High rates have not slowed GDP growth; low rates have not stimulated GDP growth. In short, interest rates can be raised to cure inflation, without hurting GDP growth.

Contrary to popular wisdom, high interest rates have a positive effect on GDP growth. When rates are high, the federal government is forced to pay more interest, pumping more money into the economy

             Not having learned from history, Chairman Bernanke now (2007) is following in the footsteps of Chairman Greenspan, cutting interest rates to cure a stagflation. It didn't work for Greenspan, who was saved by President Bush's tax cuts. It won't work for Bernanke, who may be saved by the next round of tax cuts.
             Chairman Bernanke reminds me of the child, sitting in the back seat with his toy steering wheel. He thinks he's steering the car, but he's just going along for the ride.
             There have been periods in which the Fed lowers interest rates many times, only to see the economy continue falling. Why the illusion persists is puzzling.
             There are several reasons for this counterintuitive result:
1. For consumers, high interest rates are not a strong deterrent to buying. Millions of consumers willingly pay the high rates charged by credit card companies. Auto companies offer interest discounts to buyers, as do many other retail stores. An exception might be home sales, where interest rates do raise a temporary barrier. But even here, prospective buyers quickly become accustomed to the new rates, and seldom will someone never buy a home because of high interest rates.

2. Interest paid by a borrower is received by a lender, both of whom are part of the economy. The lender uses the money to pay salaries, buy equipment, pay rents, all of which benefit the economy. Thus, interest flows through the economy, changing hands, but neither helping nor hindering GDP.

3. Interest rate changes have only a minuscile effect on any corporation's bottom line. A company borrowing $100 million, and experiencing a 1/4% rate increase, will pay an additional $250K -- pocket change for large companies.
             One exception is interest paid by the U.S. government. High rates force the government to add more money to the economy, and in this way, high rates are, to a slight degree, an economic stimulus.
             Low rates however, do lead to inflation by making money less valuable. Money is a commodity, the value of which is determined by risk and reward, with the reward being interest. The lower the interest, the less the reward for owning money, and the less valuable the money becomes.
             Increasing the federal debt has a positive effect on the economy, because debt is money and a growing economy requires a growing supply of money.

Recessions correspond with reduced debt growth.
            Contrary to popular faith, federal debt growth has declined in advance of every recession.
             Put these two facts together:

High interest rates prevent inflation and do not inhibit economic growth.

A growing economy requires a growing supply of money.
This leads to the conclusion there is one, and only one, solution to stagflation: Raise interest rates to cure the inflation and increase deficit spending to cure the stagnation.
Partial solutions have been attempted. Paul Volker, when faced with stagflation, "cured" it by raising interest rates. He cured the inflation. but the economy suffered, because it was starved for money. President Reagan's massive tax cuts then cured the stagnation, and paved the way for many years of strong economic growth.

There is one, and only one, solution to stagflation:
Raise interest rates to cure inflation and increase deficit spending to cure stagnation.

Economic Solutions Here are one-line solutions to the various problems affecting the economy. Obviously, each problem is complex, and one line can provide only the barest hint of a direction. Free Money contains the train of logic and rationale for each solution :

Solution to inflation: Raise interest rates. See 'stagflation':

Solution to recession: Increase the federal deficit.

Solution to stagflation: Raise interest rates and increase the federal deficit.

Solution to depression: Dramatically increase the federal deficit.

Solution to a "fair" taxation system: Reduce taxes. Begin by eliminating FICA and Medicare taxes. Then begin to raise the minimum taxable income level, higher each year, until all income taxes are eliminated.

Solution to the federal deficit: No solution needed. "Federal deficit" is a synonym for "federal money created." A growing economy requires a growing supply of money.

Solution to paying for the federal debt: More federal debt.

Solution to education problems: Increase federal support of schools.

Solution to infrastructure problems: Increase federal investment in infrastructure.

Solution to Social Security financial problems: Federal support of Social Security similar to Federal support of the military, i.e. deficit spending.

Solution to Medicare financial problems: Federal support of Medicare similar to Federal support of the military, i.e. deficit spending.

Solution to the health care crisis: Federal support of universal health care. More money to doctors and hospitals to encourage an increase in doctors and hospitals.

Solution to military recruitment problems: Increase military salaries.

Solution to pollution and other industry-made ecological problems: Financial rewards to companies for positive ecological steps.

Solution to poverty: WPA-style job creation.

Solution to hunger: More food stamps for more people.

             You will notice that the vast majority of economic solutions involve increasing the federal deficit. The reason: The vast majority of economic problems stem from a shortage of money in the economy (with inflation being a notable exception). A growing economy requires a growing supply of money. In the same vein, what do these data tell you?
          1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
          1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
          1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
          1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
          1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
          1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
          1998-2001: U. S. Federal Debt reduced 9%.   Recession began 2001

FREE MONEY : THE ANTIDOTE TO POPULAR WISDOM ABOUT SOCIAL SECURITY, MEDICARE, THE FEDERAL BUDGET DEFICIT AND FEDERAL DEBT, TAXES AND THE U.S. ECONOMY.
Discovery begins when popular wisdom is questioned

          Common wisdom holds that increasing the money supply causes inflation. History shows that is not correct. As you can see in the above chart, there is no relationship between changes in total debt (money) and inflation.
          The value of money is determined by supply and demand. So, it is true that increasing the money supply without interest rate control would lead to inflation, unless the demand also was increased. What increased demand? An increase in interest rates.
          In short, deficit spending does not cause inflation, because we have the power to prevent inflation at will.

Medicare and Social Security:
A Solution to the Problems

Read Letters to the Media

US Federal Debt is $9 Trillion!
Rodger Malcolm Mitchell
rmmadvertising@yahoo.com

What does this logical progression tell you?
*A large economy needs a larger supply of money than does a small economy.
*Therefore, a growing economy needs a growing supply of money.
*All money is a form of debt.
*Therefore, a growing economy requires a growing supply of debt.
*U. S. Federal Debt is the safest, most controllable form of debt, because the federal government, alone among borrowers, never will default.
*Thus, there is no federal debt or deficit problem, and a balanced federal budget guarantees recession, and depression.