I am sorry but Mr Baker is wrong. Stagflation certainly was invented in the Bard's day. It was called the Price Revolution by later historians and it morphed smoothly into the general crisis of the seventeenth century

David Horton-Smith, Sheffield,

Wouldn't it be wiser until we know we are actually in a recession to start talking about how to fix it?

Kyle, Austin, TX

Don't get confused. A cut in the FFR is not a signal of an "easier" monetary policy. The FOMC is pursing a continuation of the relatively "tight" monetary policy administered over the last 2 years. Bernanke is a monetarist.

If you don't understand this, you don't understand money & central banking:
Everybody flunked accounting:
Commercial Banks as a system don’t loan out anything. They create money when they make loans
Money creation is not self-regulating
You can’t take money out of the banking system (only the FED can)
Savings transferred through the intermediaries never leave the CB system. The intermediaries/non-banks are the customers of the CBs.
Savings held within the commercial banking system are lost to investment or to any other type of expenditure.
From the standpoint of the economy, the banks shouldn’t pay for something they already have. Payments on CB savings raise all interest rates, induce disintermediation among the financial intermediaries, shrink real-gdp, & decrease CB profits.
The proper long-term solution to our non-bank problem is to gradually get the money creating depository institutions out of the savings business (Reg Q in reverse). Then long-term rates would come down (just as executed in 1966).

Spencer Bradley Hall, Kansas City, Missouri

Seems the "Yippee, Can Do!" society can't walk on water after all. And just round the corner - it's the multi-culti UK's turn, next, for the cold bath

Douglas, Basel, Switzerland

When demand weakens, then normaly prices weaken, but a strange thing has happened. China and India have huge populations and they also seem to have huge amounts of currency, both dollars and pounds. This is because of the manufacturing base of the West collapsing and moving there, where labour is so cheap. They are probably sick of seeing their dollar bonds sinking in real terms and a great deal of that money has already and will now continue to go to buying strategic stakes in our most important banks and enterprises. The rest will probably go towards keeping the demand up for natural resources like food and oil. A deeply negative outlook then for the long term health of the economies of the West.

Davd Nammory, Liverpool,

Surely the recent steady, incessant increase in the price of oil is the key driver of this nascent stagflation -- just as it was before, during the 1970s. The only difference is that the crisis this time crept up more slowly than the sudden price shock back then. The end result is the same. The solution back then, as now, was to take steps to lessen the blow: less consumption, more efficiency, finding alternatives to work around the oil gap. It turns on Carter was not all wrong in telling America to put a sweater on (even though America hated hearing it!). But this time, we can do more. We should take this historic moment to build up solar infrastructure, on a grand scale, thereby insulating the US from further oil-related risks. A recent solar project in the Arizona dessert, 3 sq. miles, for $1 billion, will power 70,000 homes. What if we created several hundred such plants? There is more than enough space in that dessert (120,000 sq. miles) to do it. Why not now?

Marc, Brooklyn, NY

There always has been inflation in the 4-6% range - it was cheap imports and polish labour (in the UK) that kept the numbers pretty - nothing to do with good government practices.

We're now back to seeing the real rate of inflation.

Mark Piazza, Walton on Thames, Surrey

The inflation target is too low, just take a look at whats happening around the world, inflation is on the march and no wonder, as oil is up, commoditiies are up and so is agriculture. We need to rebase the inflation target and forget this wishful thinking that inflation needs to be at 2% and adjust moneterist policies accordingly.

We are facing new paradigms here.

Zak, London, UK

There is nothing FED can do to control the situation. What we are facing is a system collapse that will effect not only USA, but the rest of the world. Go to http://www.larouchepac.com/media/2008/02/23/firewall-defense-nation-state.html and watch the video "Firewall" to educate Yourself to what it takes to prevent it!

Dagfinn Klausen, Oslo, Norway

Buy dollars, buy UK Large Caps. If things get worse ... buy more. You'll look back on this next year and smile.

Paul, London, UK

Private and public debts have a mathematically predictable threshold. Once you step over it, interest rates, growth, consumption start to depend on more debts... more debts... more debts...

The parallels with drug addiction are striking - including the confused decision processes.

Peter Vernunft, Berlin, Germany

"Back in 2001, during the last recession, the US had no serious inflation threat to speak of."

Yes it did, its right here, right now.

Surely the fed is aware that its actions have lng term consequences, maybe not...

But hey, its all good, the US Gov is going to buy the bad debts at face value, revalue them, forgive the excess and sell them back to the banks.
Incompetance on a vast scale

Dominic, Manchester, UK

I'm no economist but I have to agree with Adarn of Londons last paragraph.,,,long on spending...easy credit....and savings is a four letter word to most Americans. Most have lived one paycheck from disaster. Now enter the high energy costs that now eat up any spread between an already narrow difference between income and expenses and you've got big trouble. Besides home heating and cooling expense doubling or more. Now the two family bread winners are paying 3 times what it use to cost them to get to work. A trip to the grocery has already seen prices jump eating into the already fragile family budget. What gave me an ecomomic lesson in real life was recently observing the owner of a near brand new car pull up to the gas station and pump only what he had in loose change in the door side pocket. Hate to say it, but I think the worst is yet to come.

Murph, Madisonville, USA/Kentucky

Adam, how is Bernake printing money faster than God? Over the last three months, The M1 has actually declined and the M2 has risen at an annual rate less than 1 percent.

Mark, Dallas, Texas

What recession? The definition of recession is two successive quarters of negative growth in gross domestic product. That has not occurred- yet.

Kent C, Nocona, TX., USA

Adam of London is a master of understatement. There has been a sense in the US, driven on by the likes of Dick Cheney, varying from "deficits don't matter" to "we're creating reality". Well, that's fun in 'The Secret', and the media actively collaborated in the fantasy - not so good in a real economy. Accountants, brokers and lawyers, in a shadow form of their traditional roles, invented schemes and dreams to hide the risks as well as the losses for as long as possible.

Hello, reality check - one that a lot of Americans believed would never happen.

In a depression, debt is expunged from the system. First, we just gotta find where the IOU's are buried.

Malcolm, Chicago, IL,

My understanding is that the Western World, particularly the US and Britain, have been overspending to the tune of between 4 and 8 trillion USD for the last five years and that they have both become dependent on a line of credit to achieve this overspend. Not only has this annual credit line ground to a halt, but the last five years or so are starting to get called in. No one can pay the bad debts no so good assets get firesold in a buyers market.

What will happen when the dust settles? High inflation and very high interests (between 15 and 25%). When there are so many bad debts and such high inflation, interest rates have to rise overall. Simple economics. If interest rates don't rise, good money follows bad in this climate.

Chris Curtis, Auckland, New Zealand

There is so much nonsense in this analysis that one doesn't know where to begin.

"Stimulating" the economy with lower interest rates is akin to curing an alcoholic with more alcohol. In fact, the Fed's massive rate cuts in 2001 after 9-11 were what got us into this mess in the first place. First, Greenspan allowed a stock market bubble to develop and when this burst and caused a recession, he created a real estate bubble of gargantuan proportions that has left vast numbers of financial insitutions with utter junk on their balance sheets. To now prevent a total rout of the banking system Bernanke must print money faster than God. And he is doing it merrily - he actually has few choices.

America is a country that has for long been on a spending binge with ever more credit and low savings. This was always going to be its comeuppance. The mindless cheerleaders of the establishment like Gerard Baker have long since ignored the problems. Now it seems, that may be impossible to do.

Adam, London,