As the Federal Reserve gets ready to hike interest rates for the first time in years, there has been much discussion on inflation, deflation and the apparent lack of the former and possibility of the latter. Through all the measures taken by the Fed in recent years, including holding interest rates at zero and pumping the economy full of quantitative easing capital, inflationary pressures continue to remain subdued. In fact, some analysts remain more concerned about deflation in the current environment.
What has not gotten as much attention, but should be considered, is the idea of stagflation.
Stagflation is defined by Wikipedia as “A portmanteau of stagnation and inflation, is a situation where the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa.”
In other words, as a central bank attempts to fight inflation through monetary policy such as higher rates, those very attempts can perpetuate high unemployment. On the other hand, if rates are kept low, it may cause prices and inflationary pressures to continue to mount.
Stagflation could become a household term in the coming years as unemployment remains stubbornly high and prices begin to rise…
As we have discussed, we are already in the midst of a currency war. Nations have already begun to move away from the dollar as a reserve currency, and global central banks have stepped up their game with regards to competitive currency devaluation.
And even though the U.S. may hike interest rates this year by 25 basis points, other countries such as Japan, the European Union and China are continuing with stimulus measures in order to try to boost their economies.
Unfortunately, even in spite of some of these countries pouring massive amounts of money into the economy, unemployment remains high in many areas of the world.
While these countries are attempting to spur inflation, they may succeed faster than many think. In the worst case scenario, however, these central banks may in fact succeed in igniting inflation but fail to bring employment rates higher.
Such a scenario is a distinct possibility that should be considered.
As prices rise, companies may be able to adjust their product pricing to compensate. If prices begin to rise rapidly, however, companies may not be able to keep up. In this case, corporate profits begin to suffer and thus stock prices may fall. A weakened corporate outlook and lower equities may cause lower discretionary spending, corporate layoffs and other problems. In fact, the cycle can become extremely difficult to break.
How would your current investments fare in such an environment?
Inflation can be difficult to forecast with any accuracy, and price pressures can begin to accelerate rapidly. The Fed has already revised some economic forecasts lower, and with or without a rate hike in the U.S. this year, the economy and job creation remains subdued.
Now may be the time to consider alternative assets that could stand to benefit from stagflation.
Should stagflation begin to entrench itself into the global economy, investors could be looking at years of low growth, high unemployment and higher prices. Should such a scenario come to pass, some asset classes will perform better than others.
Physical gold, silver and other precious metals may be the solution.
Precious metals have been considered a reliable store of value for thousands of years. They may provide protection against higher prices, as they may hold their value better than other asset classes or even increase in value.
Should stagflation come to roost, precious metals may benefit not only from their ability to provide an inflationary hedge, but they may also benefit from increasing geopolitical risk and overall risk aversion should stagflation take root.
Don’t wait until your dollars have lost more value. Consider an allocation in precious metals today.
To learn more about precious metals and how they may benefit your portfolio, speak with an Advantage Gold specialist today. It has never been easier to invest in physical precious metals than it is today, and our specialists will guide you through the process step by step.
Tags: inflation, stagflation