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Stagflation, An Economic Nightmare: History and How to Survive It

Finance History: What is stagflation - Lyon Bern, wealth & asset management in San Juan, Puerto Rico

In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment. Stagflation is a rare and challenging economic condition, but it has happened in the past and many believe it could happen again.

Why is stagflation so bad?

Stagflation is a combination of three negatives: slow economic growth, higher-than-normal unemployment, and expensive cost of living. It can hinder growth and recovery for years, and the longer it continues, the more it impacts the future value of investments.

Does stagflation cause a recession?

Generally, a recession occurs when an economy shrinks or contracts and inflation rates are low. In contrast, stagflation occurs similarly to a recession, but inflation rates are high for a prolonged period. In the latter case, growth can be hindered and recovery can take years.

How do you survive stagflation?

what is stagflation - lyon bern - Wealth & asset management in San Juan, Puerto Rico

Investing in bonds and credit is a good way to protect your investment portfolio against stagflation, high inflation, a recession, and market volatility. For example, floating-rate bonds adjust their interest rates with the change in the CPI (Consumer Price Index) - providing higher inflation protection.

When was the last time the US had stagflation?

The stagflation of the 1970s, a combination of slow growth and rapidly rising prices, challenged prior assumptions, leading economists to examine the causes and policies that would end the stagnant period.

How long did 1970s stagflation last?

Economists have shown that stagflation was prevalent among seven major market economies from 1973 to 1982. After inflation rates began to fall in 1982, economists' focus shifted from the causes of stagflation to the "determinants of productivity growth and the effects of real wages on the demand for labor".

What happens to house prices during stagflation?

When the economy stagnates and the inflation rate is high, this has a negative impact on property prices. Therefore, during stagflation, it can be difficult to sell your property for a profit, especially because you'll still have to pay capital gains tax.

Stagflation and its history

Stagflation is a condition in which slow economic growth (stagnation), rising prices (inflation), and rising unemployment all happen at the same time. It has occurred twice in the U.S., once between 1974 and 1975 and again between 1978 and 1982. All of this happened during a period known as the Great Inflation (1965 to 1982).

Understanding Stagflation

The term stagflation was first used by British politician Iain Macleod in a speech before the House of Commons in 1965, a time of economic stress in the United Kingdom. The term was revived in the U.S. during the 1970s oil crisis, which caused a recession that included five consecutive quarters of negative GDP growth.

History of Stagflation

Stagflation was once believed to be impossible. The economic theories that dominated academic and policy circles for much of the 20th century ruled it out of their models. In particular, the economic theory of the Phillips Curve, which developed in the context of Keynesian economics, portrayed macroeconomic policy as a trade-off between unemployment and inflation.

The advent of stagflation across the developed world later in the 20th century showed that this was not the case. Stagflation is a great example of how real-world experience can run roughshod over widely accepted economic theories and policy prescriptions.

Stagflation's Impact on Real Estate

stagflation - how it affects the real estate market - Lyon Bern wealth & asset management services in San Juan, Puerto Rico

When an economy is stagnant and inflation rates are high, it has a negative impact on property prices. During stagflation, it can be difficult to sell a property for a profit, particularly because capital gains tax must still be paid. In this environment, potential buyers may be less likely to purchase a property due to high inflation and uncertainty about the economy's future. Additionally, higher interest rates often implemented to combat inflation can deter potential buyers, further suppressing demand for properties.

Strategies for Surviving Stagflation

While stagflation can be challenging for investors, there are ways to protect your investment portfolio. Here are a few strategies to consider

Invest in floating-rate bonds:

Floating-rate bonds adjust their interest rates with changes in the Consumer Price Index (CPI), providing inflation protection. These bonds can help maintain your portfolio's value during periods of high inflation. Nothing is 100% safe but many choose this option.

Diversify your portfolio:

During stagflation, it's crucial to have a well-diversified portfolio that includes a mix of stocks, bonds, and alternative investments. Diversification can help reduce the risk of significant losses due to market volatility.

Focus on value stocks:

Value stocks tend to perform better during periods of economic uncertainty. These companies have strong fundamentals and are often undervalued, making them attractive investment options during stagflation for some.

Consider investing in real assets:

Real assets, such as gold and other commodities, can provide a hedge against inflation. During periods of high inflation, the value of these assets typically increases, helping to protect investment portfolios depending on the situation.

Look for companies with pricing power:

Companies that can pass rising costs onto consumers are usually better positioned to weather stagflation. Seeking out companies with strong competitive advantages, as they are more likely to maintain their profitability during challenging economic times, is another common resource.

Overall, Stagflation is a rare and challenging economic phenomenon characterized by slow growth, high unemployment, and rising inflation. It presents a dilemma for policymakers and investors alike, as traditional approaches to combating one issue can exacerbate another. Although stagflation can be difficult to predict and manage, understanding its causes and potential consequences can help investors make informed decisions to protect their portfolios during such periods.

By staying informed and adapting investment strategies to account for the unique challenges posed by stagflation, investors can better navigate this economic uncertainty and maintain the value of their portfolios. In the end, diversification, careful investment selection, and a focus on long-term goals remain essential components of a successful investment strategy during any economic environment.

Got any questions on how stagflation could affect your investments and portfolio?

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Disclosure: Lyon Bern, LLC is a Registered Investment Adviser and is in the business of consulting and advising its clients in wealth and asset management. Each client's diversification between Lyon Bern's portfolios will be made individually and based on the client's Investment Policy Statement. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this document will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Lyon Bern, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional investment advisor. A copy of our current written investment advisory agreement discussing our advisory services and fees is available for review upon request.


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