Despite Ben Bernanke’s assertion yesterday at Harvard University that the US economy is not returning to the stagflation of the 1970s, slower growth and rising inflation have many wondering what is a good investment during stagflation should the Fed chief’s bravado prove to be wrong.

Bill Bonner says it took Paul Volcker’s leadership, along with a crippling recession, to end stagflation in the 1970s:

Well, we repeat ourselves, what ultimately turned the situation around at the end of the ’70s was a change in regime at the Fed…the worst recession since the ’30s…and a whipsaw on Wall Street that whacked both the bond market and then the stock market, wiping out more than half the value of each of them.

At the end of the ’70s, the jig was up. When everyone had come to expect more inflation from the Fed, the central bank no longer saw any benefit in it. Its new money and credit was being anticipated and absorbed – in wage and price increases – even faster than they made it available. Inflation no longer worked, in other words. It no longer deceived businessmen into thinking they should expand production. It no longer deceived investors into believing their assets were going up in value. And even the lumpen householders had caught onto the game; as soon as they got a wage increase, they spent it quickly…and then demanded another one.

The feds didn’t have much choice. They could either inflate much more heavily than expected and wait for the disaster to catch up to them…or they could admit that the flimflam no longer worked, raise rates, and squeeze the “inflationary expectations” out of the system. Paul Volcker took the latter course. That, combined with the natural feedback look of the oil cycle – in which higher prices drew forth new supplies, as they always do – sent the price of oil back down. In today’s dollars, a gallon of gasoline sold for about $1.50 from 1986 until 2003.

Volcker’s anti-inflation Fed also knocked the price of gold down from over $800 in 1980 to around $275 in 1998.

Of course, many people expect a repeat of the story. They see inflation rising…oil over $125…and gold over $900 (it closed yesterday at $897)…and it makes them feel 30 years younger; they think they see “Mary Hartman, Mary Hartman” on TV again and Jimmy Carter in the White House. Soon, they believe, the Fed will begin raising rates; oil will fall back to $70; gold will crash back below $500; and inflation will go back to sleep.

And maybe it will happen. But we’re a long way from it, in our opinion. We haven’t really had the run up in consumer price inflation yet. Forget the eggs, say the feds. According to their numbers, the CPI is only increasing at 4% per year. Not too bad. Nothing to get excited about. And certainly no reason to renegotiate a union contract.

Nor has there been a big sell-off in the bond market. Only very recently have yields on the 10 year note crept up over 4%. And yesterday, they sank back under the 4% mark. Wait until they’re over 8% — then, we’ll talk!

And as for the stock market — what’s the problem? Stocks got killed in the ’70s…they were down 75% to 90% in inflation-adjusted terms. But what has happened in the stock market recently? The Dow is still within 10% of its all time high. And over the last 10 years, in nominal terms, it is up 2.5%.

No, dear reader, we have a long way to go before we can have a genuine recovery. First, we need something to recover from.

Puru Saxena in The Daily Reckoning says that since the Fed started slashing rates last year commodities have skyrocketed.

As an investment-manager, it is not my role to pass a moral judgment on the actions of central banks and governments.

To be fair, given the level of debt imbedded in the West, central banks have no other option but to inflate. The problem though for the U.S. economy stems from the fact that this newly created money seems to be finding a home in commodities rather than financial assets.

It is interesting to note that since the Federal Reserve started slashing interest-rates in August last year, energy, metals and food prices have gone to the moon, whereas the U.S. dollar and American stocks have plummeted.

Unfortunately for the U.S. establishment, the ‘cure’ of monetary inflation seems to be going horribly wrong as it is translating into even higher consumer and producer prices. I have long maintained that this decade would belong to commodities and the markets are proving me correct.

Over the past few months, the prices of commodities have gone through the roof due to supply and demand imbalances and massive monetary inflation. However, given the turmoil in the markets and loss of confidence, resource stocks have been punished by investors.

This development is strange to say the least, and it has paved the way for a massive buying opportunity in the most coveted sector of the future. I find it absurd that the investment-community is dumping quality resource stocks at a time when the underlying commodity prices are super strong.

At the end of the day, businesses are valued based on their corporate earnings, and with sky-high commodity prices, I can assure you that elite resource-producing companies are going to announce fantastic results in the months ahead.

Today, top-quality diversified mining companies are selling at 12-13 times earnings (bear-market valuations) and I can only guess this is due to the fact that most people expect commodity-prices to crash in the months ahead.

However, if my homework is correct and commodity prices continue to soar in the future, we will see a major re-rating in the valuations of resource-producing stocks. Some of you may remember that during the technology mania at the turn of the millennium, technology companies (even dodgy ones) sold for ridiculously high valuations.

Well, we can expect to see the same type of madness in relation to commodity stocks in the future.