Stagflation - the Worst of All Possible Worlds

Unemployment is at 5%, inflation is 6.3%. The infamous Misery Index is 11.3, its highest level since 1984.

The news that 2007 has the worst inflation numbers in 26 years fell off the MSNBC headlines quicker than an overpriced Orange County house falls into foreclosure. It is, in fact, bigger and more dangerous news than anything out of Iraq, Iran, or Israel. Some of us have been saying for years that the George Bush economic philosophy of tax cuts for the rich, massive budget deficits to fund his war toys, and maximum oil profits would eventually destroy the nation. It is. (Note to Hillary and Barack: It's the economy, stupid!)

Stagflation: an economy undergoing brisk inflation while while suffering from weak or negative growth. The inflation eats up savings and investments while the stagnation makes it impossible for even the most nimble entrepreneur to prosper. A few industries and countries make out like bandits (can we say Exxon and Saudi Arabia) while everyone else is struggling to pay for ever increasing staples while the risk of unemployment looms ever nearer.

That date 26 years ago, 1981, was towards the end of the worst longterm economic conditions in the United States since the Great Depression. For 14 years, from 1968 through 1983, the US struggled with a weak economy and rising prices. It started when a Texas President (Lyndon Johnson) racked up record deficits funding an endless war with no concern for the domestic economy. The oil price shock of 1973 strengthened the twin-headed monster. Inflation frequently topped 10% a year while unemployment peaked in 1983 at 9.7%. In 1980 the "Misery Index" (inflation plus unemployment) was over 20%. Mortgage interest rates peaked near 15% (1983) and the Prime Interest Rate broke 20% in 1981.

The end didn't come until 1983 when oil prices fell by half. Inflation broke first, falling to 3.2% in 1983. But, unemployment was still high (9.7%) and didn't fall below 6% until 1988. Mortgage interest rates didn't fall below 9% until 1991.

More graphs than you can shake a stick at:
Oil prices from 1947 to 2007
Inflation from 1946 to 2006
Unemployment from 1946 to 2006
Interest rates through history