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Stagflation 101

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“Stagflation” is a word that sounds funny, even though it is the name for a very serious situation when it comes to your finances. Stagflation refers to an economic phenomenon that occurs when the economy slows down but inflation rates go up.

Inflation on its own is scary enough, but stagflation is even more sinister. The combination of a slowdown in the economy with high inflation can put a major hurt on the average consumer, even more so than a recession alone would. After all, when it’s only a recession – even though that is a big deal, of course – you’re only dealing with a stagnant economy. You may lose your employment, but you’re not facing prices going up at the same time. With stagflation, you are facing costs rising while simultaneously seeing less income coming in.

You may or may not remember it, but the last stagflation cycle lasted for nearly twenty years. Unemployment rates were high, and the cost of living was even higher. It took a major recession to beat the inflation rates back down, and many, many people suffered during that time. Unfortunately, it appears we’re once again embroiled in a stagflation cycle.

While no one can predict if and when we will break out of it, there are ways to protect your assets while you wait for things to level out. In fact, you can even use stagflation to your benefit if you play your cards right. Major investments are not a good idea during times like these, and in order to keep your money safe, you’re going to have to do a lot of homework. Shop around for the best rates possible, and consider investing in money market deposit accounts. Alternatively, you could put your money into Treasury Investment Protected Securities. Putting money into TIPS is a good idea, because the yield actually increases during times of inflation. The money your money earns while in TIPS will increase parallel to the inflation increases.

The other way to make stagflation work for you is to buy stocks while the prices are low. The tide will eventually turn, so you shouldn’t remove your money from your stocks entirely. Buying new stock can make you more money in the long run if you’re willing to wait the stagflation period out. All in all, stagflation is a scary thing. But you don’t have to panic over it, and with some careful planning, you can actually use it to your advantage.

Written by admin

August 21st, 2008 at 11:48 am

Posted in Money

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