Of course, stagflation is one of the economic terms that have become more relevant in recent years for reasons that are very easy to understand. But do you really know what this word that seems to be very complicated means? So that you have no doubts from now on, you should know that stagflation is nothing more and nothing less than the economic situation of a country that is characterized by a economic stagnation while the rise in prices and wages persists. As you can foresee, it is a scenario that has been experienced in Spain from time to time, without going any further.
Stagflation is one of the most negative scenarios, not only for the economy in general, but also includes equity markets. Because it usually has pernicious effects on both, as you will see through this article. Something that must be taken into account is that stagflation is not inflation and despite the similarities between the two words, not much hands. It is something different and from a certain point of view much more complex and dangerous. Not in vain, a good part of the Economic politics in the world are made to generate this delicate situation.
In other words, stagflation is the equivalent of rising prices with a significant economic decline. Surely with these words you will understand much better what this term consists of. Although it may be that you have never heard it yet. But you should know that it will be very important for you to manage your personal assets or even to develop your investments. Both in regards to open positions in the stock market how to close them. Depending on the intensity of stagflation, if it emerges in a country's economy.
Stagflation: its dangers
This level in the economy is not the best news for interests of a country, whatever it is. For multiple reasons but above all very easy to understand. You don't have to be a great expert in the discipline of economics. Of course not. Because stagflation is a great danger for the citizens of any country. On the one hand, because they impoverish workers and that the price of their money is worth less and less. Not surprisingly, the increasing cost of life is putting them in a much more compromised situation each time. With risks that they cannot assume certain payments that they have in their life.
And on the other hand, by not growing the economy of a country opens a series of risks on the citizens themselves. That is, as the economy grows less jobs are less and as a consequence of this trend, consumption is being reduced little by little. With which the economy is immersed in an increasingly negative loop. To the point that it can produce a really explosive situation and that can be reflected in what happened in the world during the last century, when the great depression developed. Something that is the worst of the possible scenarios that can originate from the appearance of stagflation.
Is it easy for it to occur?
Despite what many citizens may think, stagflation is not a not unlikely scenario in a country. It should be remembered that this is what happened in Spain in the first years of the economic crisis, around 2012 and 2013. Where Spanish society had to suffer all its consequences in the form of unemployment, more expensive life and lack of monetary resources for social projects. In short, it is a very undesirable scenario from any point of view and from the perspective of all economic currents. Both from the liberals and from the most interventionists. Because the only solution is to get out of stagflation over other aspects of the economy. Because it is at the end of the day that it is.
Another of the most relevant aspects of stagflation is its distorting element, not only in what is the national economy. Rather, it also affects politics with the emergence of emerging forces that can cause equity markets to pull downward and even with great intensity, as has happened in these very special scenarios. To the point that situations of great exception can arise and that end up harming the daily life of citizens. This is a fact that becomes evident when the much dreaded stagflation emerges.
Consequences of stagflation
Now it will be necessary to verify which are the most damaging effects that this economic movement causes. Because they are many of diverse nature, as you can see from this precise moment through this interesting article. Because in effect, the following situations may occur that we expose you below.
- First of all, there is an element as relevant as that derived from the employment situation. In this sense, stagflation generates a price increase in all goods, mainly derived from consumption.
- El unemployment increases at all levels as a consequence of the lower increase by companies. Until reaching the highest levels in this economic parameter of the first magnitude.
- Equity markets are also affected by this movement since it is very prone to generate volatility and lack of confidence in the markets. All this translates into significant drops in the stock market and the consequent depreciation in the price of the securities.
- Decision-making, both by governments and by the companies themselves, become a lot more complex That so far. In regards to the measures they have to take as the correct moment to apply them. With risks of even aggravating the economic scenario.
- The saver sees how little by little your money is worth less and you have more problems to monetize them properly. You have excessive doubts about where you have to place it to obtain a more or less accepted interest rate.
Advantages of stagflation
Despite what one might think, stagflation also brings positive aspects to its development. It is not that they are much, but at least it may have some other benefit in the formation of this economic parameter. One of these cases is represented by a Tax system which is usually more benevolent, although this situation does not always occur. In particular, to incentivize companies so that they can have better results in their accounting accounts. On the other hand, the tax reduction is another element that emerges in this scenario. That is, you will have a much more favorable treatment than if there were no stagflation.
In any case, its appearance is never recommended, far from it, because the disadvantages are much more than the benefits. From any point of view and with respect to both companies and citizens themselves, who are harmed in their interests from the first moment. This is something that all economists are very clear about and for this reason all their strategies and policies have as their main reason that the dreaded stagflation does not arrive. Because if a high inflation it is really dangerous, of course stagflation will be much more dangerous.
Characteristics of this movement
Another of the most relevant aspects that must be taken into account from now on to know what stagflation is are those points that define it and of course with very varied and diverse nature. These, therefore, are some of them:
- The danger that the economy can't grow, but on the contrary the prices of goods and everything in general if they grow. Sometimes under a great and dangerous intensity.
- La distortion in the financial markets it is evident and in this sense small and medium investors are the most affected by this scenario that is created.
- It unequivocally leads to impoverishment, both of the nation and the population. One of the greatest risks derived from its appearance and above other economic variables.
- Another of its most feared effects is that this process is accompanied by a devaluation in those activities in which foreign exchange is consumed. With the consequent delay in economic activity.
It cannot be forgotten that a combination of inflation and the decline of the economy has the main effect of the economic recession. For this reason, the eternal fight against stagflation is not surprising. On many occasions, whatever the cost, since great sacrifices will have to be made by the population affected by this economic term. To the point of saying that it is one of the worst scenarios that can be installed in the economy of a country since its repercussions will certainly not be very positive, as you have warned in this article. Your control is more than ever necessary.