According to the article, "stagflation is where economic growth slows." Stagflation wasn't supposed to happen, prices rose and economic growth stagnated and, while economists would search for reasons to explain the apparently inexplicable, it was because they avoided the obvious and didn't find the answer.
Darryl Robert Schoon
Thursday, September 20, 2012
Stagflation is where economic growth slows, unemployment is high and prices rise.
Stagflation’s appearance in the 1970s was like an outbreak of three-headed children. It wasn’t supposed to happen. Prevailing wisdom—an oxymoron among economists—held that high employment and rising prices were economic handmaidens; and that, conversely, slowing economies and inflation were mutually exclusive
In the 1970s, for the first time in capitalism’s history stagflation appeared, i.e. prices rose and economic growth stagnated; and, while economists would search for reasons to explain the apparently inexplicable, it was only because they avoided the obvious that they did not find the answer.
In August 1971, President Nixon upon the advice of Milton Friedman—the same Milton Friedman who erroneously taught Ben Bernanke economic contractions can be reversed by monetary expansion—ended the convertibility of the US dollar to gold.
The consequences of cutting ties between paper money and gold were not what Friedman expected. Friedman believed—belief is the operant word here—that ‘free-market forces’ would bring floating currencies into orderly market-driven valuations. Friedman was wrong—again.
The historic severing of ties between money and gold instead would result in extreme currency swings along with slowing growth, rising unemployment and rising prices, i.e. stagflation. Friedman’s advice would make a mockery of the Phillip’s Curve—the inverse relationship between the rate of unemployment and the rate of inflation—as it later would make a mockery of money itself.
In Time of the Vulture: How to Survive the Crisis and Prosper in the Process (3rd edition, 2012), I discussed what happened when Nixon cut the ties between the US dollar and gold in 1971:
It was as if someone removed a pin from the axle of international commerce when the US dollar was no longer convertible to gold. Previously, the US dollar was linked to gold, and other currencies were linked to the dollar. Everything was stable. It is no longer so. Once the pin connecting gold and paper money was removed, everything changed. The axle of international commerce began to vibrate and lately it’s been getting much worse. The fear is that the wheels are now about to come off.
Stagflation was the result. No longer constrained by the need to exchange costly gold for increasingly worthless pieces of paper money, governments began to debase their currencies until monetary restraint was as rare as celibacy in an era of drug induced free-love.
Cutting the link between the US dollar and gold not only allowed governments to debase their currencies (the US dollar had previously connected all currencies to gold), it would eventually bring about the destruction of capitalism itself via excessive levels of debt.
John Exter, central banker extraordinaire, opposed cutting the ties between the US dollar and gold. His objections, however, were overridden by Paul Volker, then President Nixon’s Under-Secretary of the Treasury for Monetary Affairs.
Instead of raising the price of gold as Exter recommended, Volker decided to instead cut all ties between the US dollar and gold, the course of action Milton Friedman had recommended to President Nixon.
Exter later commented on the significance of that act:
The final link between the dollar and gold was broken. The dollar became nothing more than a fiat currency and the Fed [and especially the banks] were then free to continue monetary expansion at will. The result..was a massive explosion of debt
Gold Wars, Ferdinand Lips, The Foundation for the Advancement of Monetary Education, New York
After 1971, the era of gold-backed money was over. All currencies are now paper coupons issued by heavily-indebted governments with expiration dates written in invisible ink.
STAGFLATION AND GOLD
As prices rose in the 1970s, so, too, did the price of gold. In less than 10 years, gold went from $35 to $850. But the de-linking of the US dollar from gold not only ushered in higher gold prices but the heretofore unseen phenomena of stagflation and a level of economic instability commensurate with a monetary unit of now uncertain value.
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