Stagflation threatens to make a comeback | Opinion

it once again, as it battles to prevent the credit crunch spilling over from Wall Street to Main Street.

After bailing out Northern Rock, many expect that it will not be long before the Bank of England follows suit.

So far, so predictable, except this time round Greenspan apparently does not think his medicine will work - or at least not for long.

Back in the 1990s, as Greenspan points out, China, India and the former Soviet bloc all joined the world economy at the same time. The resulting flood of cheap imports meant that he hardly had to worry about his rate cuts stoking up inflation.

And however low he set the rates, the Chinese continued to invest their money in America, if only for want of anything else to do with it.

Now all this is changing. Developing countries are spending more and saving less, pushing prices for raw materials and food rapidly higher in the process.

At the same time, their exports are also

Higher rates would mean painfully slow growth, if not outright recession

getting more expensive. In these far less benign circumstances, Greenspan fears that higher, not lower, interest rates are going to be needed if inflation is to remain in check. For Europe and the US, struggling to recover from a huge credit binge, this would mean painfully slow growth for years to come, if not outright recession.

Greenspan, it should be said, is talking his book here in more senses than one. Even before he left office, critics were charging that his rate cuts would end in an unsustainable credit bubble.

His counter-claim that circumstances have changed since his day, helps deflect such criticism.

But we have been here before. In the 1970s and 1980s we were squeezed between rising prices and falling growth, and very miserable it was too.

It was called stagflation and, if Greenspan is right, it could be on the way back.