Explaining Stagflation

With all the talk about inflation and deflation, economic recessions and depressions, it’s a little hard to get a good grasp on some of the lingo and ideas behind the madness. One of the most commonly used and most commonly misunderstood concepts is stagflation. Stagflation is a pairing of inflation and wage stagnation. This situation is a double whammy wherein consumers suffer due to higher prices and a freezing or even lowering of the average wage.

Inflation most often comes from a larger money supply. When the US Government passed the stimulus bill a couple of months ago it agreed to print money out of thin air to help relieve the economic tension. By doing so they are all but guaranteeing inflation. Whether it occurs in the short, medium, or long term is a different question, but inflation is likely to occur. Couple this inflation with the fact that jobs are in short supply but high demand, making it harder for the average worker to leverage a raise or any sort of relatively decent wage entirely. Many workers have or likely will see their wages drop due to the current economic crisis.

So it can be easily seen that stagflation is more of an economy killer than inflation or wage stagnation alone. This is especially true for the poor and middle class of America. When people who are consuming beyond their means began to feel the pinch of a recession, they aren’t as likely to be able to get out of debt and make ends meet due to stagflation than someone who has been living within their means and who has been financially responsible.

In the 1920’s in Germany, stagflation reared its ugly head when one USD went from being worth 23 German Marks to 24 Billion German Marks almost overnight. People were burning bank notes to heat their houses. Wages were stagnant in the period immediately leading up to this massive inflation and the German people were powerless to do anything about it.

If stagflation does occur though, people can do something in advance to protect their wealth. Precious metals and property are two investments that hold intrinsic value no matter what a country’s currency does or how it fluctuates. Putting more of their money into investments like these is a great way to hedge against inflation and stagflation as well as an excellent way to create a financial insurance plan against the worst-case scenario. If an ounce of gold that is worth $900 today is held by an investor during an inflationary period, it could see value well about the $2000 mark, and as many analysts are predicting, could hit $3000 an ounce depending on how bad the inflationary cycle is when it comes around.

Investments that have their roots in commodities, like precious metals mining companies’ stock and real estate ETF’s could also potentially see exponential gains in an inflationary market. Having a little bit of everything in your investment portfolio is a great way to help absorb losses and realize the biggest gains, but getting yourself some inflation or stagflation insurance in the form of precious metals and property probably isn’t a bad idea either.