With all of the other economic challenges that Americans are facing right now, one outcome they don’t want is stagflation.
Unfortunately, for those who are getting close to retirement – or those who’ve already retired and are on a fixed income – the news isn’t good. According to a headline in Fortune:
‘Stagflation’ fears are at their highest since the onset of the Great Recession in 2008, Bank of America survey says
If you’re my age, you may not remember the last stagflationary period, which lasted from approximately 1970 – 1983 (exact dates vary from source to source). Even if you’re aware of those struggles, you’re unlikely to remember just how awful they were.
Back to Fortune:
Before 2022, most Americans under the age of 60 or so probably hadn’t heard of stagflation. The economic phrase that defined the 1970s – a particularly toxic economic combination of low growth and high inflation – wasn’t even a key risk in the minds of most economists on Wall Street until recently.
Today, we already know that inflation has been running hot since June 2021, and is still running hot. So all we need is one more ingredient…
Here’s how our explanation of stagflation describes it, in brief:
Stagnation is a more general term in this context, referring to an economy that is shrinking, remaining flat, or growing at a very slow rate. When a nation’s gross domestic product (GDP), a measurement of all the goods and services produced in the country, either fails to grow or actually shrinks, economists will say the nation is economically stagnant. The relevant definition here is “showing no activity; dull and sluggish.”
Unemployment is one more indicator that can signal a sluggish economy. After all, if people can’t find work, they won’t be able to spend money – which lowers demand for goods and services, which leads to more unemployment…
The official U6 unemployment rate, which factors both underemployed (part-time) and unemployed workers, currently sits at 6.7%. In comparison, that same rate was as high as 22.9% during the Covid lockdowns of 2020.
Seems like a big difference, doesn’t it?
But once you factor in long-term discouraged workers, those who’ve gone jobless for so long they’ve simply given up? Then the unemployment picture darkens even further. That rate is an astonishing 24.4% right now. Yes, that’s data from an “alternate” source – because the U.S. Bureau of Labor Statistics hasn’t published this metric since 1994.
And remember, Larry Summers thinks we need “massive unemployment” to beat inflation…
U.S. GDP for the first two quarters of 2022 did in fact run negative. That means the third-quarter growth recently reported zeroes out the year’s growth so far. Unless we see continued growth, we’ll meet the stagnation criterion, too.
The third-quarter GDP report was pretty surprising. Dig a little deeper, though, and you’ll realize it’s not quite as great as it appears. Reuters quoted a senior economist at BMO Capital Markets, who summed up the situation this way:
Despite the shiny headline number, a look under the hood shows a much grimmer picture of the U.S. economy, one that is clearly losing steam.
So when you add it all up, we already have the ingredients necessary for stagflation. With that in mind, what would it look like?
Could the next stagflation be even worse than the 1970s?
During the stagflationary crisis of decades past, inflation peaked at 13.5% in 1980. It also featured a rollercoaster of economic growth followed by up to several years of slowing GDP in the mid-1970s.
Unemployment was all over the map, peaking at 8.5% during the stagflationary period. Oil prices were extremely high. A gas crisis and recession ensued, leaving consumers waiting for hours in line to get one tank of gas at high prices.
So will it get worse this time? It’s probably too soon to tell if the next ten years will be as bad as the 1970s. But here’s what two experts think about the current stagflationary situation, starting with Simon Baptist, global chief economist at the Economist Intelligence Unit:
As the war in Ukraine and pandemic disruptions continue to wreak havoc on supply chains, stagflation – marked by low growth and high inflation – will stick around “for at least the next 12 months,” Baptist told CNBC last week.
“Commodity prices will start to ease from next quarter, but will remain permanently higher than before the war in Ukraine for the simple reason that Russian supplies of many commodities will be permanently reduced,” he added.
Next, we move to Nouriel Roubini, professor of economics at New York University’s Stern School of Business.
In a troubling article for TIME, he claimed the U.S. is “heading for a stagflationary crisis unlike anything we’ve ever seen.”
He also provided a more in depth analysis of the current economic climate, the risks facing investors today and how to protect our savings:
It is likely that both components of any traditional asset portfolio—long-term bonds and U.S. and global equities—will suffer, potentially incurring massive losses.
Losses will occur on bond portfolios, as rising inflation increases bond yields and reduces their prices. And inflation is also bad for equities, as rising interest rates hurt the valuation of firms’ stock. By 1982, at the peak of the stagflation decade, the price-to-earning ratio of S&P 500 firms was down to 8; today it is closer to 20.
The risk today is a protracted and more severe bear market. Indeed, for the first time in decades, a 60/40 portfolio of equities and bonds has suffered massive losses in 2022, as bond yields have surged while equities have gone into a bear market. Investors need to find assets that will hedge them against inflation, political and geopolitical risks, and environmental damage: these include short-term government bonds and inflation-indexed bonds, gold and other precious metals.
Stagflation may or may not ensue – it’s important to remember there’s no crystal ball. Roubini has a good track record, but no one’s infallible. And Roubini is no gold bug! If you read even half a dozen of his reports, you’ll see he doesn’t seem to have any agenda beyond forecasting the most likely near-term conditions.
It’s equally important to remember that economic downturns are inevitable. They’re unavoidable. And they’re probably more common than you think:
There have been 11 recessions since 1948, averaging out to about one recession every six years. However, periods of economic expansion are varied and have lasted as little as one year or as long as a decade.
It’s never a bad idea to consider how an economic downturn would affect your financial future. Are you properly diversified? If not, would be a good time to consider Roubini’s advice.
Diversification for protection against economic downturns
With this renewed threat of stagflation, you might be asking yourself: How do I keep my portfolio safe?
It could mean protecting your savings by diversifying with safe haven assets. Considering how inflation can quietly erode your wealth, you might want to ensure you’re diversified with inflation-resistant investments, as well.
There’s one significant overlap between safe havens and inflation-resistant investments, and that is physical gold and silver. Not only are they the “gold standard” of safe havens, their classification as commodities means their price is remarkably resistant to inflation.
As with other emergency situations, it’s better (and almost always less costly) to be prepared before rather than after.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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