Stagflation is one of the worst economic conditions a country can be in, and the United States just entered it.
It has actually been responsible for revolutions and uprisings in developed countries around the world. Most recently Greece, Spain and Portugal are experiencing severe doses of this dreaded economic condition. It is extraordinarily difficult to work through and often destroys wealth for generations.
Stagflation is simply defined by high unemployment, slow economic growth and high inflation. It makes inflationary and deflationary periods look like a walk in the park. Stagflation usually results in very long, severe recessions.
The best and most effective way to recover from stagflation is for the government to lower rates drastically. The last time the U.S. was in stagflation — in the late 1970s — that is precisely how we recovered and prospered. However, it is crucial to understand that we are not in a position to do that today since rates are already at historically low levels. This is a cataclysmic problem. How we got here is debatable, but fixing the situation will be difficult.
The reported unemployment rate is high (8.1%) but a more-accurate level of unemployment is buried in the Bureau of Labor Statistics (BLS); section U-6 of the BLS states that unemployment rate is closer to 14.5%. In any given month, both the number of people considered unemployed and the size of the labor force might change. Because the government measures both variables, it is easy to move people out of the labor force to make unemployment appear smaller.