Is Inflation the Biggest Risk to the Economy Today?

Rising inflation has been in the forefront of many people’s minds today. Prices at the pump and at the grocery store have been rising steadily for months. Those in the market for a new or used car or for a house have likewise been shocked at how prices have continued to creep up. So it’s no wonder that many people think that inflation is the biggest challenge facing the economy today. But there’s one factor bubbling underneath the surface that could take us all by surprise.

Certainly there are other economic factors at play as well, such as the massive amounts of debt in the economy, continued weakness in labor markets, and shortages of both raw materials and finished consumer goods. But economies aren’t just affected by business decisions; sometimes political decisions have an effect too. And rising geopolitical tensions could end up destabilizing the economy even if the economic headwinds are able to be overcome.

US vs. China

One of the hallmarks of President Trump’s term as President was his trade war with China. Trump sought to get what he thought was a better deal from the Chinese by slapping tariffs on imports of Chinese goods. In return, he wanted China to open up its domestic market to US products.

The effect of the trade war is that US exports to China have remained relatively constant in dollar terms. US imports from China, on the other hand, have dropped about 20% from 2018 to 2020. And because tariffs were placed on those goods, the cost to US consumers has risen tremendously.

You may have noticed that the prices of cheap goods you used to buy at Walmart or on Amazon have increased. Or you may have noticed that cheap tools or machining accessories that you used to see all over Amazon and Ebay are no longer listed. Tariffs have had a real effect on what goods are still available to US consumers.

The overwhelming consensus before the 2020 election was that a Joe Biden victory would undo Trump’s trade war. Yet Biden has done nothing to roll back Trump’s tariffs. If anything, tensions with China have increased since Biden took office. And it isn’t just trade and economic issues that are the problem either.

China has become increasingly aggressive in both its actions and its rhetoric since Biden took office. Its military has sent flights of combat aircraft into Taiwan’s air defense zone. And recent comments from Chinese officials have even threatened Australia. Whether this is just saber-rattling or the lead-up to actual conflict is unsure. But the uncertainty, and the potential for violence, has unnerved many.

An all-out war with China would obviously result in significant disruption to US supply chains and destroy businesses who retail Chinese-made consumer goods. But even a lesser conflict would cause significant disruption.

The major threat right now would be China trying to forcibly invade Taiwan. Would the US go to war to defend the island? If so, it could cost us dearly in terms of sunk aircraft carriers and troop lives lost. If not, then the US’ reputation would take a tremendous hit. But the consequences of a takeover of Taiwan would almost certainly include some sort of embargo of China, which would similarly upend US supply chains and have a major impact on US consumption.

Geopolitical Issues Could Take Center Stage

Of course, conflict with China isn’t the only geopolitical risk to the economy. The recent conflict between Hamas and Israel could always flare up into a greater crisis in the Middle East, which could impact oil prices. And continued instability in Syria, Libya, and other areas could flare up at any time.

The number of areas where geopolitical conflict could flare up into all-out war isn’t small, and investors are doing themselves a disservice if they don’t take into account the risks of war and conflict. We’ve been fortunate that we haven’t seen a major world war over the past 75 years, but that’s an anomaly over the course of world history. It’s only a matter of time before someone makes a mistake, someone gets offended, or someone misjudges his opponent’s intentions, and before you know it the whole world is engulfed in war.

It was just such a mistake that led to World War I, and the mistakes of concluding that war led to World War II. All it took was one man assassinating a crown prince in the middle of the Balkans and the entire world was completely upended for decades to come. An entire generation of young men was wiped out, centuries-old governments were overthrown, and communism gained a foothold that it has not yet relinquished. How different the world would be today if the Great War had never occurred.

Now just think how something like that could happen today and imagine the consequences. For many investors, that could be dire. That’s why it’s important to take geopolitical risks into account when making your investments.

Gold Stands the Test of Time

When looking at the various geopolitical and economic crises that have occurred over the centuries, one thing stands out. Those who have tangible assets often have a better chance of coming out alright on the other end than those who don’t. Just look at Weimar Germany, for instance, where those who owned gold and silver fared far better than those with bank accounts and pensions.

Gold in particular has stood the test of time, maintaining its purchasing power over the long run, while paper currencies continually lose value. That’s why so many investors turn to gold to safeguard their wealth when times of crisis are on the horizon.

While we all hope to live our lives in peace and freedom just as we have for the past several decades, that isn’t guaranteed. And it’s far better to be prepared for conflict and not have conflict take place than to enter an era of conflict completely unprepared.

If you have retirement savings that you want to last you 10, 20, or 30 years into retirement, maybe it’s time you started thinking about how to protect those savings and make sure they’re still around when you need them. Don’t let years of hard work, saving, and investment go to waste. Call the experts at Goldco today to learn how gold can protect your retirement savings.