Our new upcoming stagflation

A group of friends and I agreed last week that the most likely result of the most likely policies coming out of this administration is stagflation.

Talking about it reminded me of the Wise Bread post I wrote All about stagflation, so I re-read that. I think has held up pretty well, even though circumstances (financial crisis followed by a pandemic) meant that things didn’t play out as I’d expected. Even so, I think the analysis of how to produce a stagflation is right on: raise interest rates to bring down inflation, but then panic when it’s clear that you’re in danger of producing a recession and cut rates before you’ve gotten inflation under control; repeat until you have high inflation and a recession.

That is, stagflation is usually the result of a timid Fed, that’s afraid to do its job.

The thing is, the policies that I see coming (tariffs and tax cuts) will produce stagflation even if the Fed does a great job. The tariffs directly raise prices, and the tax cuts (through increased deficits) raise interest rates, producing a recession.

In the Wise Bread article I warn that it’s tough to position your investments for stagflation. The reason is that inflation makes the money worth less (helping people with debts, but hurting people with money), while the recession hurts people with debts and people with investments.

Upon reflection though, I don’t think it’s quite that bad. In fact, it’s really just regular good financial advice:

Avoid debt (you’ll get crushed by a recession faster than you’ll get rescued by inflation).

To the extent that you have assets, move them into cash (initially you’ll get screwed by inflation, but pretty soon rising interest rates will save you).

Limit your investments in stocks, and especially limit your investments in your own business (both much too likely to get crushed by recession).

Basically: live within your means and stay liquid.