Stagflation is where economic growth slows, unemployment is high and prices rise. Stagflation’s appearance in the 1970s was like an outbreak of three-headed children. It wasn’t supposed to happen. Prevailing wisdom - an oxymoron among economists - held that high employment and rising prices were economic handmaidens; and that, conversely, slowing economies and inflation were mutually exclusive.
In the 1970s, for the first time in capitalism’s history stagflation appeared, i.e. prices rose and economic growth stagnated; and, while economists would search for reasons to explain the apparently inexplicable, it was only because they avoided the obvious that they did not find the answer.
In August 1971, President Nixon upon the advice of Milton Friedman - the same Milton Friedman who erroneously taught Ben Bernanke economic contractions can be reversed by monetary expansion - ended the convertibility of the US dollar to gold.
The consequences of cutting ties between paper money and gold were not what Friedman expected. Friedman believed - belief is the operant word here - that ‘free-market forces’ would bring floating currencies into orderly market-driven valuations. Friedman was wrong - again. Read more >>
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