Stagflation is a combination of the words "stagnation" and "inflation." It is a term used by economists to describe a situation where high inflation and low economic growth combine to produce high unemployment with a rising cost of living. Job creation is not keeping pace with population growth and the number of people of working age entering the labor force, yet the government continues dumping more money into the system to pay for social programs and stimulus spending.
Socialist entitlement spending mandates that the Federal Reserve Board keep printing more money at a time of falling productivity and employment. Although fewer goods are produced, more money is dumped into circulation driving up prices, and no jobs are available to meet the rising cost of living. It is a socialist utopia, where equality between rich and poor is achieved.
This was situation in the 1970s, when the Carter Administration sought to keep the Great Society programs of the 1960s going, and even expand upon them. Saving money becomes impossible, because the cost of living increases faster than the value of any investment return in a no growth environment.
And without savings, new job creation becomes impossible. People consume whatever they produce as fast as they produce it, because money becomes worthless if you hold onto it (like a game of Hot Potato, or an ice cream cone melting in your hand). This is much of the theory behind Keynesian economics and stimulus spending.
While goods are being consumed as fast as they are produced, people with money - workers and those on the entitlement dole - receive value for their money at that day's current prices; however, no one can ever advance or realize a gain. Those without money - the unemployed without access to the government dole - suffer incredible hardship. This leads to increased demand for more government socialist spending in a society that already is becoming "progressively" impoverished.
One sign of stagflation is when bond yields decrease while the value of gold increases, as is occurring in mid-2011.
Stagflation is not a failure of capitalism. It is a failure of government and the Federal Reserve Board which created the conditions of no growth through entitlement mandates, then prints more money to fulfil those mandates without any increased productivity or employment.
- Technically, the Federal Reserve is privately owned and controls the money supply. The U.S. Treasury, at the direction of Congress, issues bonds and other debt notes which the Federal Reserve buys with Federal Reserve Notes. The Fed, by buying or selling Tressury notes (when the Federal Reserve sells Treasury notes to banks it buys back its own Federal Reserve Notes and drains excess currency out of the system), regulates the amount of currency in circulation. By voting for massive deficits, i.e. future promises to pay with Treasury notes, Congress can flood the econony with cash now to spend and consume, a so-called "stimulus." The net result is no savings and no new job creation.
- or "prodigality," as Adam Smith referred to it.