The Case for Stagflation: 3 Reasons the 2020s Could Be Painful

With a median age of 38 years old, the majority of Americans alive today have no experience with stagflation. To them, stagflation was something this country suffered through during the 1970s, a distant memory, and the only knowledge they have of it comes from history books or economics lectures for those who even bother to study economics in college.

That means that most finance and investment professionals still active today also have no recollection of stagflation, nor do they remember how investors survived the stagflation of the 1970s. With stagnant stock markets, periodic gas shortages, high inflation, and high unemployment, the 1970s were a decade that many investors would rather have just forgotten about.

In fact, the investor experience of the 1980s and 1990s still informs most investment and financial advice today. The 18-year period from 1982 to 2000 saw some of the most phenomenal stock market growth in history, with annualized average gains of over 15% for that period. You almost would have had to try not to make tremendous investment gains during that period.

In the 20 years since then, however, stock markets have fared much more poorly, particularly in the aftermath of the 2008 financial crisis. And now the country could be on the verge of stagflation, a possible period of even more lackluster growth. With no experience navigating the waters of a stagnating market, tens of millions of American investors could be facing very uncertain times ahead.

There are three major factors that could results in the 2020s being another period of stagflation. And unless investors are familiar with them and take steps to safeguard their assets, they could be at risk of significant losses.

1. Rising Inflation

Perhaps more than anything else, the 1970s were known for being an era of high inflation. Official price inflation statistics hit double digits by 1974 before dropping back below 6% in 1976, then peaked again at over 11% in 1979. Inflation remained high in the early 1980s before Paul Volcker’s Federal Reserve pumped the brakes and brought inflation back under control. Since that time we have seem moderate inflation and have no experience with high inflation.

High inflation was tolerated because the mainstream economics profession clung to the idea of the Phillips curve, the idea that short-term higher inflation would lead to greater employment. What happened, however, is that both unemployment and inflation rose during the decade, something that wasn’t supposed to happen.

That’s what led to the coining of the portmanteau of stagflation, combining (economic) stagnation with inflation. It was a unique experience that upended mainstream economic orthodoxy and, for a time at least, had economists wondering what had gone wrong. But now that it’s been over 40 years since it ended, even our policymakers have forgotten how we got into that mess in the first place, and it looks like we’re repeating the same cycle all over again.

Year-on-year inflation recently hit 5%, and the Fed expects media inflation this year to rise to 3.4%, a full percentage point higher than its prediction in March. While the Fed expects this higher inflation to be transitory, that seems to be wishful thinking.

Remember that the Fed in 2007 thought weakness in the subprime mortgage market was contained and wouldn’t spill over to the rest of the economy. How wrong they were. And if they’re wrong again this time, we could be on the verge of a long period of higher inflation.

2. High Unemployment

The 1970s were also marked by high unemployment. Starting the decade at 3.9%, the unemployment rate peaked at 9% in 1975. And by the end of the decade it was still at 6%.

Today we’re facing an unemployment rate of 5.8%, far higher than before COVID. Millions of Americans remain out of work, many of them relying on unemployment insurance for their continued survival. And the outlook for the future isn’t very rosy, with many companies having great difficulty in finding workers.

Things may very well get worse before they get better. And that’s one more reason the 2020s could end up being another decade of stagflation.

3. Easy Money

The major driver behind the 1970s stagflation was the loose monetary policy of the Federal Reserve. The early 1970s saw the chickens come home to roost, as the effects of monetary easing during the 1960s and President LBJ’s guns and butter policies led to inflation and stagnation in the 1970s.

That was exacerbated by President Nixon’s decision to close the gold window in 1971, severing the last official link between the dollar and gold. The Fed was now no longer constrained in its conduct of monetary policy, and could inflate to its heart’s content.

It began to do so throughout the decade, and by the time Jimmy Carter’s Fed Chairman G. William Miller took office, inflation began to rise out of control. Miller was so abysmal at combating inflation that he was promoted to Treasury Secretary so that Paul Volcker could take over. It took him a few years, but he was able to get inflation back down to manageable levels.

The difference between Volcker and the current Fed Chairman is that Volcker at least understood from his college days that excessive inflation would lead to rising prices, and that that was a bad thing. Current Fed dogma sees nothing wrong with rising prices, and in fact the Fed wants prices to rise, confusing nominal price increases with increases in wealth.

And so we see a Federal Reserve that continues to create money out of thin air with no regard for the consequences. With continued money creation and no signs of it slowing, inflation is going to be a force to be reckoned with for some time to come.

The Case for Gold as a Remedy

Millions of investors still remember the effects of the 2008 financial crisis, when stock markets lost over 50% of their value. Savings and investments that had been built up for decades were obliterated in a matter of months. And for years afterward, investors had great difficulty finding good investing opportunities.

Among those who fared the best in the aftermath of the crisis were those who invested in precious metals like gold and silver. From 2008 to 2011, gold nearly tripled in price, while silver more than quintupled. Many vowed at the time that the next time there was a crisis, they would be sure to be invested in precious metals.

That performance from gold and silver wasn’t an anomaly or a fluke, however, as the two precious metals performed well during the 1970s stagflation as well. Both gold and silver averaged over 30% annualized gains during the 1970s, far outpacing both stock markets and inflation. If the 2020s end up being another stagflationary decade, gold and silver could very well perform just as well as they did during the 1970s. In other words, the worse stagflation gets, the more likely it could be that gold and silver increase in price.

If you have retirement savings that you want to protect against a stagflationary investment environment, now is the time to start thinking about gold and silver. With a precious metals IRA like a gold IRA or a silver IRA, you can invest in physical gold or silver coins or bars while still enjoying the same tax benefits as your existing tax-advantaged retirement accounts. And if you want to roll over or transfer assets from an existing 401(k), IRA, TSP, or similar retirement account into a precious metals IRA, you can do so tax-free.

Don’t wait until inflation gets really ugly to protect your wealth. Talk to the precious metals experts at Goldco today to learn more about how gold and silver can safeguard your assets.