Stagflation – The Financial Pandora
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The mainstream media is focused on comparing the 2020 economy to the Great Recession and Great Depression. It’s because these events sound so great that they become the focal point of everyone’s economic fears. The reality is we’re more likely to face a long period of stagflation. Understanding what that means, and which assets do well in stagflation are the keys to outlasting this rough market.
Consumers should treat their finances like a small business. That involves keeping track of operational and overhead costs, along with tracking revenue versus spending. Increased prices and decreased wages equate to razor-thin margins. The working class is presumably in a bind, and the government’s economic stimulus is unlikely to change that.
If you’re looking for a path forward in this economy, this guide is for you. We’ll explain what stagflation means, how it’s caused, and which assets perform well under these economic conditions. Let’s start by defining the term, so you understand what we’re talking about. What Is Stagflation? – YouTube
Stagflation – Search (bing.com) is a combination of several factors that all point toward a difficult economy. It occurs when prices are affected by inflation alongside unemployment and other economic output factors. This means people are earning less money while spending more on everything from housing and utilities to food, medicine, and consumer products.
The term “stagflation” was initially coined in the 1960s, when a politician in the U.K. The House of Commons described the combination of employment stagnation and inflated prices. As the U.S. entered recession in the 1970s, the country adopted the stagnation concept to describe the situation. Until that time, stagnation was viewed as an impossible economic theory.
Employment and inflation were often connected in early macroeconomic data, but that isn’t necessarily the one-to-one causal relationship it was painted to be. Over the past 50 years, every recession aside from the 2008 Financial Crisis and proceeding Great Recession was accompanied by inflation. Even then, the market was split, as consumers continued spending through the economic dip.
Because the 2020 economy is unprecedented, it’s important to examine how stagflation was initially caused. Let’s look back at the American economy in the 1970s to determine the root cause of the phenomenon.
What Caused Stagflation in the 1970s?
If stagflation boomed in the 1970s and is now commonplace, the economic and geopolitical climate of the era should be examined. President Richard Nixon’s Watergate scandal, the United States involvement in the Vietnam War, and quadrupling of oil prices caused a chain of events that caused the stock market to plummet while prices climbed higher.
The weakened economy caused double-digit unemployment, which was, at the time, unheard of, and fewer had money to afford rising interest rates and prices.
It began in 1972 and stretched into the 1980s, showing the failure of American monetary policy. Nixon already inherited a recession when he took over from Lyndon Johnson in 1969 due to increased social welfare and war spending.
It was during Nixon’s first term that Social Security was expanded by Congress and the White House in time for the 1972 presidential election. Despite being fiscally conservative, Nixon also implemented wage and price controls in 1971 that, once removed in his reelection, sparked another recession.
The Nixon era is also notable to cryptocurrency enthusiasts as the time when the White House unlinked the U.S. dollar’s gold backing, turning it into a modern fiat currency. This move ignited a run on the dollar, which was devalued and hurt the Arabian oil barons who held large stocks during America’s automotive boom.
Foreign confidence in U.S. currency was at an all-time low, which meant buying oil (and anything else) from overseas started to cost more.
People who were alive at the time incorrectly associate the stagflation with countries in the Middle East raising oil prices, but that’s only a surface-level observation. The root cause remains the underlying issues in economic policy that devalued the dollar. So, what assets can you depend on when the U.S. dollar’s value goes down?
What Assets Do Well in Stagflation?
The first lesson Wall Street investors learned during the 1970s stagflation was they couldn’t keep up with inflation by depending solely on U.S. stocks. The U.S. market had unemployment dragging down its productivity.
Stocks were extremely volatile, while inflation continued a straight upward curve. If the dollar is down, investment in the government is risky. That leaves three solid investments to consider.
1. Seek Stronger Foreign Bonds and Cryptos
The fundamental issue with stagflation is you have access to fewer dollars, and those you do have access to don’t go as far.
When the dollar isn’t worth as much, it’s time to start looking outside the box to see the bigger picture. Comparing the dollar to stronger investments is crucial to outperforming the dollar on the market. Essentially, if the dollar is getting weaker, invest in whatever it’s weaker than. Value is all relative, so stagflation will inevitably affect some investments more than others. Each country’s government, citizen, and industry responses will differ, and that will put some currencies in a better position to rise faster than the U.S. dollar.
On top of this, there are thousands of cryptocurrencies that cross borders and can potentially outperform fiat currencies exponentially in the future (as they’ve proven in the past).
2. Purchase Hot Commodities
Not every investment needs to be in security for a company. Commodities like precious metals, industrial metals, and other industrial and agricultural goods can help you weather a stagflation period.
Exposures to commodities are much easier to access in modern times than they were
in the 1970s, and the crypto industry has currencies, securities, and commodities too.
When the Covid-19 crisis began, toilet paper, bleach, and isopropyl alcohol became hot commodities. No matter which direction currencies go, we will always have a need for commodities. That segues to the last investment.
3. Locate High-Performing Stocks
Just like each country is affected in a different way, companies are too.
The global coronavirus lockdown forces mass furloughs in industries like retail, media, and healthcare. Meanwhile, tech companies like Microsoft, Amazon, Facebook, Apple, Google, and Netflix soared. Performing due diligence and investing ahead of the market is necessary to survive stagflation. Think of it as extreme couponing for securities. With all this talk about stagflation, it may come off as fear mongering, so let’s address how stagflation compares to recession.
4. Is Stagflation Worse Than Recession?
The short answer is that yes – stagflation is worse than a recession. It’s because stagflation combines the bad economic effects of a recession (stock declines, unemployment increases, housing market dips) with inflated prices. When this is dragged out over the long term, it becomes a problem that can have a big impact on societal habits.
Inflation devalues anyone on a fixed income and crushes margins for personal finances.
In response, consumers spend only on the necessities, and that starts to create stress fractures in the economy. Imagine not having a job, waiting anxiously on your unemployment payments to come in, and prices continue going up.
That’s exactly what’s happening right now, and that’s why many analysts believe the 2020s will be marked by an extended period of economic stagflation.
Are We Entering a Period of Stagflation?
While world leaders are doing their best to mitigate the problems caused by the 2020 novel coronavirus pandemic, the fact is our country spent over 60 days in a state of lockdown. Both small business owners and unemployed citizens are scrambling to find money to pay bills, and most of the stimulus funds promised in the CARES Act have already run dry.
Taxes are going to need to be raised to pay for public programs that can’t be stopped. In the U.S. alone, there have been over 20 million unemployment claims since the beginning of the shutdowns. Both foreign markets and cryptocurrencies are struggling as well. The option to invest outside of the Covid-19 impact zone is gone – everyone was affected.
And prices are already increasing.
Whether it’s groceries, cleaning supplies, video game consoles, or even medical marijuana during a month-long 4/20 cultural holiday, businesses are removing deals. Retail margins are already razor thin, so you won’t find the same sale prices on staples or luxury goods that you used to. It’s not a question of when we enter stagnation, because it’s already happening.
Only this time, it isn’t oil taking the heat. In fact, gas prices plunged during the lockdowns, with fewer cars on the road. Just like in the 1970s, it’s likely that monetary policy will continue these problems for a long time to come.
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