A few posts back I wrote that what we were increasingly likely to get here in the US is stagflation. One of the headlines in a Reuters article today was “Greenspan sees early signs of stagflation.” I am sure this does not come as a surprise to him, given the role he played in creating this trend. Although many are critical of Greenspan, I feel he did the best he could working within the flawed frameworks that he was forced to operate within. As smart as all these people are, you cant change the fact that the economic/political system itself it flawed, and the truth of it eventually becomes apparent.

We can only try to utilize the inefficiencies that are created, protect our wealth as much as we can, and profit from the mess if at all possible.

The natural state of capitalist economies is deflationary. But governments do not like that because it makes it tough for them to grow and redistribute (steal) wealth. If you are old enough to do so, think back to the early 1070’s The Bretton Woods agreement forced governments’ around the world to have a degree of discipline with their spending. But if you are waging wars and creating large inefficient bureaucracies something like a gold standard can become inconvenient. So the US said, “forget it, we want out….” And the devaluation and inflation began. The current state of affairs should be no surprise to anyone. Yes, we have had some good times, such as the late 90’s and early 2000’s where the deflationary forces of global capitalism overpowered the inflationary tendencies of governmental frameworks.

Is stagflation really a threat? Some in the financial media will say that because the housing bubble is collapsing, there are deflationary forces at work. To an extent this is true. But given the nature of todays global economy that deflationary effect may not play out as they expect.

The long term trend for global commodity demand is a very strong one. The US is not alone anymore as an economic force in the world. Yes, it is still the largest economy, but trends are what matter, and prices are made at the margin. Stagflation is indeed a threat, at least for the USA….