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How Likely is Stagflation to Occur?

Stagflation, one of the unique economic concerns to emerge in the 1970s, and something that helped pave the way for Ronald Reagan to become President of the United States with his economic policies, is once again a concern for many investors within the U.S. While a somewhat complex occurrence, stagflation itself is simple to explain. It is the term given when inflation increases, but the economy does not grow at a comparable rate. In other terms, prices go up, but there is no widespread basis on an economic level for that increase in price to have occurred.

To be clear, stagflation is not currently going on within the U.S. economy. But with the rumor of increased governmental spending plus the perception that a Federal Reserve rate hike will occur before the end of the year has increased the likelihood of stagflation happening, according to analysts. Add in the uncertainty that has accompanied the election of Donald Trump to President, and you have a recipe for something extreme to happen. It is natural that analysts will predict doom and gloom also, thanks to the fact that negativity often generates clicks and this is good for websites trying to make a few extra bucks here and there.

Realistically, there is only a small chance of stagflation happening. Fund managers that were interviewed on this topic came to the conclusion that there was about a 23 percent chance of it happening, and the outcome was completely dependent on a mixture of Fed actions and how new economic policies, if there are any, are implemented. This is essentially a huge reflection of the uncertainty that many people have when it comes to what a Trump Presidency really means. So far, there have been no real signs that the economy will not see the proper growth necessary to prevent stagflation. And while this is all theoretically a possibility, it is not likely to occur at all. This doesn’t mean that trader psychology will not move prices, though. Binary options traders especially should keep their eyes open for unwarranted movement in order to increase their chances of profits when corrections occur.

One of the issues that contributed to stagflation back in the 70s was the fact that the interest rate was set at far too low of a price by the Fed. There were other factors beyond this, such as oil embargoes, but the Fed’s inability to gauge what was going on within the economy was a contributing factor. Furthermore, there was a strong belief that the executive had put pressure on the Fed to keep rates low. There is speculation that this could easily happen again in the current situation. Stagflation was eventually eradicated in the early 80s when the Fed implemented large interest rates. It was not a great solution and it was not a very popular one, but it was still one that ultimately proved to be effective.

As a trader, knowing economic history and knowing how past events have impacted traders in similar situations, will be a helpful point of reference. The good news is that we have far more tools now than what existed in the 70s. Spot Forex trading was not a reality at that time, and binary options were still a long ways away from emerging. So although this is more of a hypothetical warning right now, it is important to know that you have experiences to draw upon in the event that this does happen. And thanks to the expansive set of trading tools that we have at our disposal today—tools that didn’t exist when this last happened—traders have the ability to turn such an occurrence into big profits, if for some reason the naysayers prove themselves to be correct in this instance.

Categories: Economy

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