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Word of the Day from The Housing Bubble Blog: Stagflation

I was catching up on the chatter at The Housing Bubble Blog and saw this little gem:

10-year note yield down big today. What does it portend . . .

What does it portend??? STAGFLATION. Stagnant economy with high inflation and no jobs. Welcome to hell.

I was recently talking with some friends about the economy and the topic of a recession coupled with inflation, as opposed to the devaluation of the dollar, or reduction in inflation at least, that's supposed to accompany a downturn in the economy.

A quick google turns up the wikipedia entry for stagflation

From the article:

Stagflation is a term in macroeconomics used to describe a period characteristic of high inflation combined with economic stagnation, unemployment, or economic recession.

Stagflation is thought to occur when there is an adverse shock (a sudden increase, say in the price of oil) in a country's aggregate supply curve. The effects of rising inflation and unemployment are especially hard to counteract for the central bank. The bank has one of two choices to make, each with negative outcomes. First, the bank can choose to pursue a loose money policy to stimulate the economy and create jobs by increasing the money supply (by lowering interest rates) and exacerbate the inflation problem further. Or second, pursue a tight money policy (by increasing interest rates) to try and rein in inflation at the cost of perhaps increasing unemployment further.

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