April 5, 2007 / 12:32 PM / 12 years ago

Saving for stagflation

WASHINGTON (Reuters) - Here’s a multiple-choice question for savers and investors: What’s a more frightening prospect now, inflation or recession?

The answer, of course, is both. Accelerating prices and a slow- or no-growth economy is a killer combo that’s been called “stagflation” since the 1960s, and it’s not fun.

Folks of a certain age might remember the stagflation which dominated the U.S. economy in the 1970s. It was a gloomy time when energy prices (and gasoline lines) dominated the news; when whole industries slumped at the same time, and when job losses and price hikes seemed to travel in tandem.

Now, some Federal Reserve-watchers are suggesting we’re facing another bout of the same malaise.

Remarks in the Fed’s latest policy statement “just scream stagflation” writes investment blogger Tim Iacono. “The Fed’s stagflation dilemma is getting tougher,” according to another economic story.” The word “stagflation” was mentioned some 2,480 times in recent blog postings, according to online monitor Technorati.com.

It’s easy to see where the concerns come from. On the recession side, there’s the housing slump, the worsening mortgage market, the continued loss of jobs to lower-paid workers in developing countries and — as Circuit City recently proved with 3,400 pay-related layoffs — right here at home. Pay raises have been blah for several years running. If you’re looking for inflation signs, you need look no further than February’s 1.3 percent gain in producer prices and 0.4 percent rise in consumer prices. But you can look at the accelerating price of manufacturing supplies reported by companies across many industries in the Institute for Supply Management. Or just check what you’re paying for health care, college tuition, gasoline or that monthly mortgage.

These economic trends are worrisome, though there are some reasons not to fear a recurrence of the 70s ... Interest rates are starting much lower, and the Fed’s fear of inflation borders on paranoia. Slow wage growth and jobs should hold prices down, too. The 1970s forces which really pushed markets over the top — an oil embargo and a private family’s cornering of the silver market — aren’t in evidence now, and even homeowners who have seen home prices slide recently are still sitting on a lot of equity. The easy-money credit markets could keep consumers bolstering demand. And, most importantly, things never happen exactly the same way twice.

But, things do fall apart in ever different ways, so it makes sense to position yourself for “all of the above” without going overboard. Here are some pointers:

— Don’t go overboard. Overboard behaviors include selling all of your stocks, bonds, and your house and putting the money into gold, palladium, art, or any other commodity that doesn’t pay dividends or interest or have earnings.

— Worry about yourself first. Collectively, consumers do need to continue spending to keep the economy on the move. But it’s probably better for your own finances to shirk this responsibility for a while. Reign in spending and start paying off credit card balances and other bills in the biggest chunks possible.

— Organize your debts. Stagflation, the last time around, saw interest rates rising to usurious levels. Use the time you have now to lock in decent fixed-rate mortgages, transfer balances to low-rate cards, or use other loan products on the market to keep your debts manageable and stable.

— Stay invested and diversified. Stocks may not be great every year, but as long-term places to keep money, they beat bonds, gold and shoeboxes all to heck. Keep your retirement fund in a mix of stocks, foreign stocks, bonds, and more. Even if bad times come, spreading your money around will moderate the impact on you.

— Keep an inflation kicker. Mining stocks, inflation bonds, real estate investment funds, natural resources mutual funds all have different pros and cons, but you’ll be happy with any of them if we do undergo a period of runaway inflation. Keep a corner of your portfolio reserved for this. Typically, that’s no more than 10 percent.

— Invest in yourself. You may not be able to count on your salary going up in tandem with the costs of running your life. But the right computer, management, or language course could position you for a better (and better-paying) job down the road.

— Save money. The worst part of stagflation is that it makes it harder and harder to save any money. But do what you can. The more cash you have to call upon in an emergency, the less desperate or destitute you’ll have to be if those 2,480 bloggers turn out to be right.

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