Invesra, Invest in your Future

If you read the headlines and financial blogs, you might have seen the word “stagflation”.

Stagflation may be the worst of all possible worlds. When you marry “stagnation and inflation”, you get stagflation. Stagflation occurs when inflationary conditions collide with low economic growth. Many current definitions of stagflation make no reference to unemployment but in older definitions, higher unemployment is another hallmark of stagflation.

What causes stagflation has varied opinions. The popular press cites price shocks (rapidly rising oil prices) as the catalyst for stagflation. Others argue that expanding money supply too quickly can create stagflation. Perhaps a combination of these two events can drive an economy towards stagflation. The 1970’s was the first time that the U.S. had seen these two economic conditions collide.

Why is stagflation such a dreaded economic foe? No matter what the cause, stagflation renders our economic tools suboptimal. To combat either inflation or recession (stagnation), the Fed may raise or lower interest rates. In either case, the Fed is inflating or deflating the economy. How do you revive an economy that is sluggish without fueling inflation?

If you are lucky enough to not remember the 1970’s, here are the key similarities:

• rapidly rising oil prices,
• rising unemployment,
• highly stimulative monetary policy, and
• stimulative fiscal policies to finance the Vietnam War (substitute Iraq).
• Fashionistas from the 70’s and today will note the return of platform and wedge heeled shoes!

So what is to be done? In a stagflationary environment, look to reduce costs and save more if you can. If you are in a position to borrow for a first time home, this may be a good time provided you are comfortable with your job stability and the monthly payments are affordable.

Take a financial inventory to see how much you have set aside, how much exposure you have to equities and bonds, and how much consumer debt is riding on your shoulders. If you suspect you could be an employment casualty of a slowing economy with rising prices, it pays to have PLAN B.

PLAN B is an indirect strategy. It is what you do before you lose your job. It is also what you should do on a regular basis no matter what the economy is doing.

1. Network with friends and old colleagues. Do not cutoff your social and business outlets just to save money. That kind of money is well spent if you truly believe you could be laid off.
2. Research businesses that can withstand varied economic cycles. These companies may be able to hire during this period.
3. Learn new skills that may help you through a period of unemployment with temporary work.
4. Don’t panic if the equity markets falter during this period. These are the risks of investing and to time the ups and downs is much more difficult than it would seem.
5. If you do not have retirement goals and a plan to meet those goals, establish a savings plan and a long term asset and income goal.
6. Focus on the things you can control such as entertainment expenses, dining out unnecessarily, movies. Spend time doing items 1, 2, and 3.

Remember: the only economy that should concern you is YOU:

• your job (source of cash),
• your cost of living (use of cash) and
• your financial health (assets vs. debts).