Deutsche Bank Economists Warn of Stagflation


Just a few months ago it seemed that everyone thought the US economy was on fire. Markets were doing well, unemployment was low, and the real risk we were told was an overheating economy. But now we realize that isn’t actually the case.

The risk in reality is of an economy slowing down, of growth stagnating, and of recession. Not just any recession, mind you, but stagflation.

The concept of stagflation first arose in the 1970s and was coined to describe what most mainstream economists of the time thought was impossible: high inflation, high unemployment, and stagnant economic growth.

According to the Keynesian orthodoxy of the time, higher inflation was supposed to lead to lower unemployment, and lower inflation would lead to higher unemployment. It was believed that monetary authorities could fine tune the economy’s performance by making that trade-off between inflation and unemployment. But the 1970s proved that wrong.

For many people, the 1970s were a time better forgotten. A society that was still facing the effects of the Vietnam War and of the societal revolution embodied by the student protests of the late 1960s was now facing rising prices and a stagnant economy.

Inflation peaked at 11%, while unemployment peaked at 9%. Oil prices rose, price controls were instituted, and shortages wracked the economy.

A lot of that sounds pretty similar to what’s happening in the world today. But despite the headwinds faced back then, not everything was doom and gloom.

A Golden Glimmer of Hope

The one bright spot for many people was the performance of gold and silver. The two precious metals saw annualized growth of over 30% per year over the course of the 1970s. The performance of precious metals far surpassed that of many traditional financial assets during that decade. Prices rose so much that even the debased silver coinage that circulated in many countries up to then was finally withdrawn from circulation because it became too expensive to produce.

And now more and more analysts are getting wise to the fact that this decade may very well end up as a repeat of the 1970s. Does this mean that the same assets that performed well in the 1970s might do the same today? Could buying gold today end up paying dividends?

Deutsche Bank analysts recently came to the conclusion that commodities (including precious metals) could end up doing better than traditional financial investment assets over the next decade. The patterns between the 2020s and the 1970s are so similar that they just can’t be denied.

Parallels Between Now and Then

The 1970s started off with President Nixon closing the gold window, severing the last official link between the dollar and gold. That got rid of the last restraint keeping the Federal Reserve from creating money ad infinitum. And it’s no wonder that prices started rising after that obstacle was removed.

Similarly, the 2020s started off with the Federal Reserve creating trillions of dollars out of thin air to finance the government’s fiscal stimulus in response to the recession created by lockdowns. And now we’re starting to see the effect of those trillions of dollars result in higher inflation.

There are numerous other parallels between now and the 1970s: rising oil prices, supply chain disruptions, rising crime, and the feeling that the bonds of civilized society are breaking down. For older Americans who remember Yogi Berra, this is deja vu all over again.

And that’s undoubtedly why Deutsche Bank’s analysts are warning that commodities may be one of the few bright spots for investors in the coming years. With inflation as high as it is, the ability to make positive real returns is becoming more and more difficult. After all, with inflation at 8%, that means your investments have to make gains of over 8%, otherwise you’re losing money.

That’s higher than the long-term returns of most financial investment assets, which is strike one. Then there’s the fact that most financial assets are already at extremely high valuations, making it difficult to imagine the possibility of 8% or higher growth on a sustained basis in the future. That’s strike two. Finally, there’s the reality that the fight against inflation is in the hands of the Federal Reserve, which doesn’t exactly have the best track record. That’s strike three.

Can You Protect Your Wealth?

Many people have already seen the writing on the wall and seen the parallels between now and the 1970s. These are uncertain times, and for all we know the US economy may already be in recession. If the next recession ends up being protracted, stagflation may become a much more familiar concept to more Americans.

Thousands of Americans have already started protecting their assets with gold and silver in an attempt to stay ahead of possible stagflation. And many more are undoubtedly sitting on the sidelines, hoping for markets to stay strong but ready to protect their assets if need be.

Deutsche Bank analysts aren’t the only ones warning of stagflation. Mohamed El-Erian, the former CEO of PIMCO and chief economic advisor to Allianz, is also warning that stagflation is almost inevitable. And according to recent news reports, 77% of investment fund managers foresee stagflation in the future.

That’s a sobering statistic, and one that should underscore just how much pain the economy could be facing. If you haven’t thought about protecting your assets yet, when are you going to?

The last thing anyone wants is to suffer another 2008-type loss. But with more and more people looking at what’s going on today and seeing the similarities to 2008, the likelihood of another 2008-style crisis occurring seems to be growing all the time.

While markets came crashing down during the 2008 crisis, gold gained 25% and continued to climb. Many of the people buying gold today undoubtedly remember gold’s performance back then, which is why they’re looking to add gold to their portfolios today.

If you want to learn more about how gold can help protect your hard-earned wealth, call the precious metals experts at Goldco today. With thousands of satisfied customers over more than a decade of doing business, our representatives are ready to answer any questions you have about safeguarding your savings with gold.

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About the Author: Trevor Gerszt