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Can We Fight Stagflation?

by Peter G. Miller
January 27th, 2008

What can you do about the oncoming recession?

If you don’t have one, consider a fixed-rate mortgage. The FHA mortgage program is terrific, but there are equally good conventional fixed-rate loan programs out there. As is always the case, you have to shop around and speak with target=”_blank”>lenders to get the best deal.

Oh, about the recession.

While Wall Street analysts, Washington politicians and perplexed economists wonder “if” there might be a recession, the real question is how bad will it get. You might think that the Fed’s rate reductions have been good for the economy, but they’re short-term fixes that may actually produce a worse result: inflation.

Inflation was the big worry at the Fed until the end of the summer when it suddenly dawned on the bright folks in Washington that the foreclosure mess was real.

Why is inflation a worry? Inflation has the effect of making dollars worth less. Seen the other way, it takes more bullion to buy a loaf of bread. The loaf of bread contains just as many slices as before, but currency is worth less so more dollars are required to buy the loaf.

We now have tens of millions of households with adjustable-rate mortgages. For many, monthly payments are at the cusp of affordability — if payments increase there is no additional money to off-set higher costs. Happily was have enjoyed a period of remarkably-low interest levels, around 6 percent and even below.

But imagine what will happen with inflation. Rates will go up. ARM payments will increase. If you think we have high levels of foreclosure today, you won’t believe the carnage created by a touch of inflation.

What do you get when you cross a recession with inflation? “Stagflation” — not a condition you want to encounter.

Why isn’t Washington worried about inflation? When inflation comes someone else will be in office.

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