We’re reaching the definition of stagflation.  A faltering economy and higher and higher commodity prices.  This is what we saw in the 1970s and 80s and now again in 2008.

Stagflation is defined as a period of stagnant economics and rising prices.  Surely we see this, GDP growth is negligible, the price of commodities such as food and energy are through the roof and any hope for future prosperity comes from inflation growth.

Inflation
Inflation plays a key role in this bad economic period just as it does in any downturn.  When housing was falling apart and the banks blew up, namely Bear Sterns, the central bank started flooding the banking industry with liquidity in the form of freshly printed money.  The government started sending out economic stimulus checks to fulfill the belief that inflation in the short term holds down unemployment.  The macroeconomic trade off looked pretty good.  But even the unemployed numbers aren’t holding up like they should.  The inflationary cycle is being heated up by energy prices that act as a short term deflationary prospect and limits inflation in the US.  Money exported is as good as being out of the money supply.

Commodities
Higher commodities prices are the direct result of high inflation, but not just over this year.  Since the end of the gold standard in 1971, more dollars has popped out of thin air.  True money supply, or M2 money supply is up nearly 400% just in the last 15 years.  Now that commodities have caught up to the money supply due to a global economy, the United States is paying for the last 20 years of deficit spending.  Also leading to stagflation.

GDP Growth
This has been discussed plenty of times, but the only GDP growth that we are currently seeing is due largely to inflation.  The banks have a fresh $500 Billion in liquidity, thats 10% of the current M2 money supply.  If inflation runs this rampant but prices only advance by a few percentage points, there is a belief by Wall Street that the economy is growing but its due to a greater amount of money not a greater amount of productivity.

Defining a period of stagflation isn’t easy as its usually made known during or after the fact.  Investors should start putting money where the money is, into consumer staples.  Even in an economic backlash, people will still demand the staples of life.  If the economy keeps worsening, investment dollars will flow into staples, pushing up the price for these stocks.  Get them while they’re cheap.