14 Oct


The Worst of Both Worlds!

We have warned several times about the return of stagflation to the US, most recently in July.   (See The Mother of All Stagflationary Debt Crises!)

But back then most people seemed to believe the Fed’s insistence that inflation itself was not much to worry about.  It was only a passing phenomenon.  And since stagflation is an economic environment that combines troublesome elements of both stagnation and inflation, or weak on non-existent economic growth, accompanied by rising prices, if the Fed were right about inflation not rising to the level of an actual, you know, economic problem, we couldn’t have stagnation.

But the folks in the marbled halls of the Marriner Eccles building in Washington were wrong again.  (We wonder:  don’t they ever tire of being wrong about almost everything?)  And now, just a few months later inflation is suddenly at a 30 year high, and alarms about stagflation are being sounded far and wide. 

A new report from the World Gold Council, Stagflation rears its ugly head (10/12/21), explains why we call stagflation the worst of both worlds: 

Over the past two months, economic growth has disappointed even as inflation has exceeded expectations. A real risk of stagflationary conditions, with rising costs amid lower growth, appears to be on the cards.

Stagflation, if severe, can be damaging to both the economy and financial markets. But we don’t need a repeat of the 1970s for assets to be affected.  Our analysis shows that even mild stagflationary conditions can have similar asset impacts to those in more severe stagflations.”

Stagflation has historically hit equities hard. Fixed-income returns have been variable, while both commodities and gold have fared well. Gold’s historically strong performance can be attributed to higher inflation and market volatility supporting capital preservation motives, and lower real interest rates supporting both opportunity cost and growth risk motives.

-World Gold Council

Others are commenting on the oil price shocks of the 1970s.  They contributed to stalling business conditions in the stagflation decade.  Now, with inflation undeniable, oil is rising again and has broken above $80 a barrel, the highest price since 2014, which could lend to a slowdown in growth.

Last summer we cited famed NYU economist Nouriel Roubini who says “a +slow-motion train wreck looks unavoidable.”  He worries that debt ratios are much higher today than they were in the 70s.  Debt ratios are three times higher than in the stagflation decade.  “The stagflation of the 1970s will soon meet the debt crises of the post-2008 period,” says Roubini.  “The question is not if but when.”

Thus, the conditions that propelled gold and silver to new highs in the stagflation decade are assembling again.  We recommend our friends and client take steps now to protect themselves in a time-tested way, with a solid portfolio of gold and silver.

Republic Monetary Exchange precious metals professionals are available to help you implement a sensible strategy for wealth preservation in inflationary and stagflationary times.