Stagflation officially returned today with a nasty GDP reportthat showed only 1.8 percent real growth, but 3.8 percent for the consumer spending deflator. It’s a mini version of the 1970s: low growth, higher inflation.
Looked at another way, rising inflation is coexisting with high, near-9 percent unemployment. Keynesians argue this can’t happen. They believe strong growth and too many people working leads to high inflation. But they were blown out of the water way back in the ’70s. And their view is hitting another pothole right now.
Supply-siders know that inflation is a monetary problem. Growth is caused by low tax-rate incentives. And the combination of flat tax rates and sound money could produce strong growth with no inflation. Think 1980s and 1990s.
But that’s not what we have now.
The dollar is falling relentlessly and gold is soaring. These market indicators are correctly predicting higher inflation as the Fed creates more excess money than anybody knows what to do with.