Stagflation

Singapore experienced stagflation in the 70s, same period as USA.

Stagflation in the 1970s
The term "stagflation" -- an economic condition of both continuing inflation and stagnant business activity, together with an increasing unemployment rate -- described the new economic malaise. Inflation seemed to feed on itself. People began to expect continuous increases in the price of goods, so they bought more. This increased demand pushed up prices, leading to demands for higher wages, which pushed
prices higher still in a continuing upward spiral. Labor contracts increasingly came to include automatic cost-of-living clauses, and the government began to peg some payments, such as those for Social Security, to the Consumer Price Index, the best-known gauge of inflation. While these practices helped workers and retirees cope
with inflation, they perpetuated inflation. The government's ever-rising need for funds swelled the budget deficit and led to greater government borrowing, which in turn pushed up interest rates and increased costs for businesses and consumers even further. With energy costs and interest rates high, business investment languished
and unemployment rose to uncomfortable levels.

In desperation, President Jimmy Carter (1977-1981) tried to combat economic weakness and unemployment by increasing government spending, and he established voluntary wage and price guidelines to control inflation. Both were largely unsuccessful. A perhaps more successful but less dramatic attack on inflation involved the "deregulation" of numerous industries, including airlines, trucking, and railroads.
These industries had been tightly regulated, with government controlling routes and fares. Support for deregulation continued beyond the Carter administration. In the 1980s, the government relaxed controls on bank interest rates and long-distance telephone service, and in the 1990s it moved to ease regulation of local
telephone service.

But the most important element in the war against inflation was the Federal Reserve Board, which clamped down hard on the money supply beginning in 1979. By refusing to supply all the money an inflation-ravaged economy wanted, the Fed caused interest rates to rise. As a result, consumer spending and business borrowing slowed abruptly. The economy soon fell into a deep recession.

What's more frightening inflation or recession?
The answer, of course, is both. Accelerating prices and a slow- or no-growth economy is a killer combo that's been called "stagflation" since the 1960s.

Folks of a certain age might remember the stagflation which dominated the US economy in the 1970s. It was a gloomy time when energy prices (and gasoline lines) dominated the news; when whole industries slumped at the same time, and when job losses and price hikes seemed to travel in tandem.

Now, some Federal Reserve-watchers are suggesting we're facing it again.

Remarks in the Fed's latest policy statement "just scream stagflation" writes investment blogger Tim Iacono. The word "stagflation" was mentioned some 2,480 times in recent blog postings, according to online monitor Technorati.com.

It's easy to see where the concerns come from. On the recession side, there's the housing slump, the worsening mortgage market, the continued loss of jobs to lower-paid workers in developing countries and -- as Circuit City recently proved with 3,400 pay-related layoffs -- right here at home. Pay raises have been blah for several years running. If you're looking for inflation signs, you need look no further than February's 1.3 percent gain in producer prices and 0.4 percent rise in consumer prices. But you can look at the accelerating price of manufacturing supplies reported by companies across many industries in the Institute for Supply Management. Or just check what you're paying for healthcare, college tuition, gasoline, or that monthly mortgage.

These economic trends are worrisome, though there are some reasons not to fear a recurrence of the 70s. Interest rates are starting much lower, and the Fed's fear of inflation borders on paranoia. Slow wage growth and jobs should hold prices down, too. The 1970s forces that really pushed markets over the top -- an oil embargo and a family's cornering of the silver market -- aren't in evidence now, and even
homeowners who have seen home prices slide recently are still sitting on a lot of equity. The easy-money credit markets could keep consumers bolstering demand. But, things do fall apart in ever-different ways, so it makes sense to position yourself for "all of the above" without going overboard. Here are some pointers:

Don't go overboard. Overboard behaviors include selling all of your stocks, bonds, and your house and putting the money into gold, palladium, art, or any other commodity that doesn't pay dividends or interest or have earnings.

Worry about yourself first. Collectively, consumers do need to continue spending to keep the economy on the move. But it's probably better for your own finances to shirk this responsibility for a while. Reign in spending and start paying off credit card balances and other bills in the biggest chunks possible.

Organize your debts. Stagflation, the last time around, saw interest rates rising to usurious levels. Use the time you have now to lock in decent fixed-rate mortgages, transfer balances to low-rate cards, or use other loan products on the market to keep your debts manageable and stable.

Stay invested and diversified. Stocks may not be great every year, but as long-term places to keep money, they beat bonds, gold, and shoe boxes all to heck. Keep your retirement fund in a mix of stocks, foreign stocks, bonds, and more. Even if bad times come, spreading your money around will moderate the impact.

Keep an inflation kicker. Mining stocks, inflation bonds, real estate investment funds, natural resources mutual funds all have pros and cons, but you'll be happy with any of them if we undergo a period of runaway inflation. Keep a corner of your portfolio reserved for this.
Typically, that's no more than 10 percent.

Invest in yourself. You may not be able to count on your salary going up in tandem with the costs of living. But the right computer, management, or language course could position you for a better (and better-paying) job.

Save money. The worst part of stagflation is that it makes it harder and harder to save any money. The more cash you have to call upon in an emergency, the less desperate or destitute you'll be.