stagflation

How Trumponomics Could Bury the U.S. Economy in Stagflation

Although Trump has yet to take office, many people have already begun making predictions about what the next four years will entail.

One possibility that most are not aware of is an economic phenomenon to be avoided at all costs: stagflation.

What Stagflation Is and Why It Matters

First, before we dive into details, let’s make sure we’re all on the same page about stagflation.

To understand stagflation, you need first to understand stagnation. The latter refers to slow economic growth combined with a relatively high rate of unemployment. When you add inflation (rising prices) and/or a decline in GDP (Gross Domestic Product), you now have stagflation.

As you can imagine, this is a severe economic problem with potentially catastrophic consequences. Fortunately, it’s very rare. The most-cited example – and the first time the term was used – occurred during the recession of 1973 to 1975. The country’s inflation shot up rapidly during this time period as GDP shrank.

An even more extreme example of stagflation happened in Zimbabwe in 2004. This is the last instance, but it also serves as a grim reminder of what happens when this economic menace occurs.

Back in 2004, the government of Zimbabwe had printed far too much money, driving their country into stagflation and quickly brought on full-fledged hyperinflation. That’s another danger associated with stagflation; if it isn’t addressed, it can quickly evolve into something even worse. Zimbabwe’s economy did not benefit from this mass printing; jobs were lost, and the nation found itself with lots of people out of work and money that was quickly becoming worth nothing.

Stagflation in the 1970s

Before we address President Trump, let’s now look at how stagflation occurred in our country back in the 1970s as this should help you understand how it could happen again.

Up until the 1970s, economists believed that unemployment and inflation always moved in opposite directions. However, leading up to the stagflation of this decade, the Federal Reserve brought about an increase in costs because of their artificially low-interest rates and unanticipated shocks to the market caused by things like the oil embargoes of ‘73 and ‘79.

At the same time, international competition increased along with unemployment. This strangled GDP growth and kept it from keeping pace with inflation.

This chart does a good job of illustrating this period:

stagflation

We could spend an entire article on this decade alone, but we’ve covered the important points for the sake of this piece and, hopefully, it’s clear how dangerous stagflation is.

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How Trump Could Bring Back Stagflation

It’s no secret that many people are worried about what the future holds with Donald Trump as our president. However, amongst much of the hysteria, many economists are concerned that he may resurrect stagflation after 40 years of dormancy.

How could this happen?

Well, first, it’s important to appreciate that the stage may already be set. We’re not suggesting that stagflation is something Trump could simply cause overnight. Instead, it’s that the economy is already hanging in the balance, so poorly-thought-out policies would be enough to cause serious problems.

According to, Bob Bryan at Business Insider:

“A more ‘populist’ Trump could see a dramatic disruption to trade which would weigh heavily on the global growth outlook, while a much tighter immigration policy could ultimately push the US towards stagflation,” said Ben Laidler, chief global strategist at HSBC in a note to clients.

Nearly all economists are in agreement that the combination of Trump’s fiscal stimulus and higher barriers to trade will lead to inflation. The issue is whether Trump can bring about the economic growth that would make that inflation manageable for the average American.

One of the biggest issues is that Trump’s plan to spur economic growth may be coming at the wrong time. Fiscal stimulus is designed to stimulate economic growth by creating private demand through the workers that are hired to work on the projects and kick-starting private investment. The amount of private demand created for every government dollar spent is called the money multiplier.”

Again, much remains to be seen. However, the problem with the plan laid about above is that it works best during a downturn in the economy or a recession. If he uses it during the current economic climate when growth is slow but steady, and the labor market is already pretty tight, there may be no upside.

Another issue is that if Trump begins uprooting trade policies and replacing them with deals more favorable to the U.S., other countries may retaliate and bring about a trade war.

Even if Trump’s stimulus plan does nothing more than keeping growth around its current level, increasing inflationary pressures from the labor and trade markets could pull our country into stagflation.

How This Would Affect You

In case this sounds like macroeconomics that may never impact your household, consider a few things. First, if the Federal Reserve keeps printing money and raising inflation, your savings will be hit. That’s the insidious thing about inflation; it’s not as though you can just save your money, keep it out of the market, watch your spending and wait for the hard economic times to end. Inflation will literally make your savings worth less.

Second, the bond bubble may pop soon. So if you thought to put your savings into the tried-and-true shelter of government bond funds, you might soon be in for a shock. Pair that bubble popping with stagflation, and it’s hard to find an optimistic spin for this.

Third, stagflation could leave you without a job. At the moment, the unemployment rate is not great. If stagflation hits, there could be a ripple effect that increases that rate even more within a year or less.

If there’s any hope in this situation, it’s that, as we mentioned earlier, so much is still unknown. There is plenty President Trump may or may not do. The Federal Reserve can also react to counteract any major decisions he makes. Also, it’s important to point out that Donald Trump is not a king. There are still checks and balances in place, and many within his own party do not support the idea of increasing spending.

Now that you understand what stagflation is, you should be better able to anticipate its onset and act accordingly to keep your money safe.
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