Over the past couple of weeks, we’ve seen Inflation, a not-so-good jobs report, and lines at the gas pump in many states.
At some point, you probably heard people old enough compare what’s going on to the 1970s. I bet you’ve heard people — including myself — call what’s going on “stagflation.”
So what is stagflation?
Well, it’s a combination of inflation (when prices start increasing fast) and stagnation (economic growth slowing to a near halt).
Put stagnation and inflation together, and you get stagflation. Simple enough.
Stagflation isn’t common, though. It only happens under certain conditions. That’s why the last time we saw it in the United States was in the ‘70s.
Why Does Stagflation Happen?
Economists have come up with two primary explanations behind why stagflation occurs.
The first one is when an economy runs into a supply shock, aka a drastic change in the supply of a good. Usually, the good has to be quite crucial to the global economy…
Like oil.
However, that’s just one piece of the puzzle. Something that causes inflation doesn’t often slow economic growth because more inflation generally means more spending, which means more economic growth.
That’s why there’s another explanation: good ol’ fashioned government policymaking.
Governments may sometimes enact policies that slow economic growth inherently. More regulations or taxes are a good example. At the same time, central banks may enact monetary policies that expand the money supply too fast, causing inflation.
All of these things came together in the 1970s to create the stagflation the decade is known for.
During that decade, the energy crisis caused an oil supply shock. As you know, oil underlies our economy in a substantial way — so when we hit a petroleum shortage, causing oil prices to start climbing, prices of everything else followed along.
Such a shortage made production more expensive across much of the economy, slowing growth at the same time.
In other words, a rare case of the supply shock doing both at once.
This is partly (but not completely, more on that in a second) why the gas lines happened. People waited forever just to fill up their cars because there just wasn’t enough gasoline.
And then, on top of that, Nixon tried to counter the rising inflation early in 1971 by enacting wage and price controls — freezing prices and wages from changing. This kept oil (and thus gas) artificially low despite rising oil prices as the decade progressed and the oil crisis hit. People took advantage, of course, making the gas shortage even worse.
But when it happens, jobs are hard to come by (let alone jobs that pay a decent living), yet your gas and groceries seem to get more expensive by the day…
So are we seeing it again?
Is Stagflation Happening Now?
Well, let’s look at everything that’s happened over the past year or so.
First, you had COVID-19 hit, causing governments to lock things down. The Federal government sent out several rounds of stimulus and tons of aid to businesses, alongside expanded unemployment benefits and, of course, the Fed pumping money into the economy at breakneck speeds.
And they are still doing it to this day, although a bit less.
As you might expect, much of this probably led to the 4.2% consumer price jump in April (along with economies reopening). That’s more than double what the Fed usually targets.
You can pull up a price chart of nearly every commodity, too, and you’ll see them headed upwards recently (with maybe a bit of pullback).
Not to get nostalgic for the ’70s, but there’s oil, too. Some more green energy policies from the new administration contributed to a huge spike in prices. There were even gas shortages, but you can blame hackers for that one.
Heck, I recently saw a news clip of people on the street talking about how everything at the store seemed pricier… so it isn’t just a bunch of abstract numbers.
Ok, but that’s all inflation stuff. What about the economic stagnation?
Well, there’s a supply shortage… but this time, it’s labor. Just look at the recent jobs report that was WAY off.
One theory is that people don’t want to go back to work because they don’t have to. All those unemployment benefits have kept them paid. It’s not a huge paycheck, but it’s more than some lower-end jobs.
As a result, you see some economic slowdown because some businesses can’t find enough employees to continue growing.
Alongside that, increased prices of all these goods will slow down growth more. Companies have to spend more money for the same amount of goods (such as raw materials).
So in short: the price of various goods is going up, meaning inflation. Some people aren’t working, which, combined with those rising prices, leads to less business growth, meaning stagnation.
So yeah, we might be facing stagflation.
How Do You Beat Stagflation?
So how do you not get crushed financially when every dollar you own is worth less by the day and it’s harder to find a job (let alone one that pays you enough to keep ahead of the inflation)?
Well, all you really need to do is earn a higher rate of return than the rate of inflation. You need some way to start earning more money.
That doesn’t have to be trading. You could also pick up some gig work, start a business, something that’ll get money flowing in at a faster rate than inflation can take from it.
The reason I’d recommend trading, though, is that some of these very same conditions have caused volatility… and volatility creates plenty of profit opportunities.
And you don’t have to be super skilled to try it out, either. In fact, I can help you kick start your trading income and help you stay ahead of the stagflation.
If you’re interested…
