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If stagflation was coming, how would you invest your money?

May 14, 2011 1:54 PM ET
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From The Economic Peephole. Visit and sign-up for email or feed delivery of new articles.

What is stagflation?

Stagflation, that word from the 1970′s that describes an extremely painful economic environment where the economy is either stagnant or in decline (along with wages) and at the same time there is inflation present.

Stagflation = Inflation + No economic (or declining) growth)

In other words, the worst of both worlds!

In the 1970′s then President Jimmy Carter blamed an oil price shock for the economic condition that faced the country, and while the oil piece is true, some economists also place the blame on the Carter solution for stagflation which was to increase the level of government spending coupled with easy monetary policy.

Hmmmm. Inflation in the form of higher crude oil and other commodities, massive amounts of government spending and easy monetary policy. Sound at all familiar?

Could the United States be facing another period of stagflation? And if we are, what are the safest places to invest your money?

Stagflation resistant investing or where to invest today for a potential problem tomorrow?

Because no one can be sure what will occur down the road although we can speculate, the key is diversification!

Bonds: If you are investing in bonds during a period of stagflation, the idea is to keep the maturities as short as possible so that you are not investing in todays dollars to be paid in less valuable dollars down the road.

Stocks: When the economy is weak and raw materials more expensive, the key is to look for stocks in companies that have the ability to raise prices and continue to sell product, or pricing power!

Commodities: Once again when looking for an investment vehicle that can perform well during stagflation in the economy, look to those those that are necessities, something along the lines of food.

Most of all be your own best advocate and follow the markets to understand what is happening in the economy!

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