One topic that we cover on Mind Your Money frequently is stagflation, simply because stagflation is the perfect storm for investors.
It is terribly damaging to stocks and equally toxic for bonds. Gold investments, on the other hand, have historically performed very well during periods of stagflation.
That’s why when a mainstream financial news outlet like The Wall Street Journal covers stagflation, we draw attention to it. When someone tells you that stagflation is coming, what they’re really telling you is to prepare for a bear market in stocks and bonds and a bull market in gold investments…
Stagflation is back, ready or not
Commentary: U.S. revisiting economic woes of 1970s
PORT WASHINGTON, N.Y. (MarketWatch) — The dreaded combination of stagnation and inflation has returned, bringing with it new challenges for policy makers, investors, business people and consumers.
As far as policy goes, it is tough enough to reduce unemployment. It is also no picnic to keep inflation at bay.
But it is a real challenge to deal with both at the same time, which is what policy makers must do when confronted with stagflation. This is because fighting one problem risks exacerbating the other.
While neither unemployment nor inflation is uncommon, every so often, both rise together to alarmingly high levels. Take the period from 1973 through 1975, for example.
The economy entered into a recession in November 1973 and did not stop falling until March 1975 — a period of 16 months, which at that time was the longest downturn since the 1930s.
Meanwhile, inflation, which had risen from 3.6% at the beginning of 1973, to 8.3% when the recession began, continued to rise throughout 1974, peaking at an annual rate of 12.3% in December of that year.
This double-digit inflation was caused by rapid money growth in the wake of the quadrupling of oil prices in late 1973, which led to a sharp rise in inflation expectations, especially through cost-of-living-clauses in private and public contracts.
However, the combination of sharply rising prices and interest rates depleted buying power, causing business to cut back. Layoffs rose, sending the unemployment rate from 4.9% in the fourth quarter of 1973 to a high of 8.7% by the second quarter of 1975.
It took Paul Volcker to vanquish inflation. The Fed chief’s policy of tight money and record-high interest rates produced a double-dip recession from 1980-82 — but sent inflation tumbling from an annual rate of 15% in early 1980 to only 2.5% by the middle of 1983.
On the surface, today’s economy looks like just a case of stagnation. After all, it’s the unemployment rate that’s high at 8.3%; the reported rate of inflation has been below 2% for the past few months.
But here is the rub: While some prices, such as fuel, are up noticeably, today’s inflation seems to be very low, probably a result of giving less for the same price.
For example, in the supermarket, you now find 10 mini-bagels for the price of 12, and 21 garbage bags for the price of 25.
Summer camps are now giving your children seven weeks away for the price of eight. And how many of you have noticed new menus at your favorite restaurant with new (higher) prices?
Now the government’s surveyors are supposed to pick this up, but they are usually late to the party until it’s called to their attention, as we are doing here.
More (visible) inflation lies ahead. The drought has already sent grain prices soaring. Cattle will soon follow. Besides food, prices are already rising across the board for such staples as cars, clothing, and shelter — and, of course, medical care.
If the Fed eases further, reported inflation is bound to rise. If fiscal policy tightens, the economy will probably slide back into recession.
Since both seem likely to happen, you might as well add stagflation to your list of concerns.