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         Wed Mar 26 23:00:00 2008
The Great Stagflation of 2008
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Wed Mar 26 23:00:00 2008
 
The Great Stagflation of 2008
 Get ready for the next few years.
Well, the bad news keeps coming in.  
 
Nationwide housing prices continue to fall, with a staggering 11% drop in January alone.  
 
Oil prices keep going up, and aren't likely to stop going up for another year or two at least. OPEC can't raise production much since producing countries are running out of oil, and it will take a while for Americans to replace their existing cars and power plants with more efficient models. Gas prices are around $3.30 locally, and I predict we'll see over $4.50 for a gallon of regular gas before 2010.  
 
$4.50 is a big jump in gas prices. How can I be so sure?  
 
I'm sure because inflation is also about to make some dramatic jumps. Latest inflation rates are high, but they will probably get much worse. Multiple companies are reporting that they have to raise prices due to transportation and food costs. (And often food costs rise because of transportation costs--the nation's corn crop is at a high price because of increased ethanol production).  
 
This is the classic setting for stagflation, where growth is low, and moving interest rates doesn't help. If you lower interest rates you just stoke inflation, and raising interest rates just slows growth.  
 
Many people assume that monetary policy (the Federal Reserve's base interest rate, for instance) is the only economic lever.  
 
However, there are multiple other levers. Another good tool is fiscal policy. There is a classic way out of this situation: keep interest rates up (avoid inflation) and stimulate growth via public spending. However, we can't do that now because the government is already at historic debt levels. The government can't really spend anything more because like American consumers, the government owes too much.  
 
So we are pretty screwed. Even gold is a dubious investment, given its recent price rise. So my recommendation is to keep your money in somewhat inflation-free investments such as real estate or stock indices. A savings account is likely to lose value, and even bonds may not keep up with inflation.  

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