Here is the second “stagflation survival tip” I’ve picked from an older friend’s brain over the weekend: avoid debt.  (First stagflation survival tip was stock up.)  Gee, I say that one in any economic situation LOL so what makes stagflation any different?

Debt and Inflation

The big difference is that the talking heads and economic “gurus” out there will try to tell you that debt is the smart thing to do with money in inflationary and stagflationary times!  The rationale is that the dollars you repay debt with will be worth less than the dollars you borrow.

This makes sense on the surface, and if the only problem we have is straight inflation I might be half-way inclined (if I could put aside my zealous anti-debt sentiments, that is!) to agree.  But we don’t have only inflation to worry about: the economy is in some form of downturn - heck even the president has admitted that much!  Some economists think we are in recession, and the true pessimists among them are calling this the start of a depression.  While I haven’t gone quite that far into economic pessimism just yet, the truth is the economy is not as good as it was even a year ago.

Debt and Stagflation

So it ain’t just the inflation, it’s the economic downturn and inflation (classic definition of stagflation for those wondering).  How does this change your battle plan?

Well, if you read this blog regularly, you won’t be wanting to run out and get into (or back into) debt in this lifetime!  LOL  For the record, my friend who gave this advice has and uses credit cards, and believes debt is a tool, not a form of indentured servitude or slavery.  So, when someone who uses debt says to avoid it, it’s time for folks to listen up!

First, the inflation side: since the value of the dollar is no where near what it used to be, and a dollar will buy you less and less in inflationary times, you want to build in an “inflation cushion” into your budget.  I just did this for the May budget, with $50 extra allocated for groceries “just in case” while raising my gasoline category for the second straight month and the third time this year.

If you go out and get yourself some debt during these times, that reduces the amount you have as inflation cushion.  Your wages will be behind the power curve in regards to inflation and expenses, as employers will have higher costs just as you do and will try not to increase their expenses.

Debt and Recession (economic downturn)

Finally, while reading up on all the factors that go into a recession as defined by NBER (the ones who get to make the “official” call on whether we are in a recession or not) I noticed economists break up the parts of a recession into three categories: leading indicators, coincident indicators, and lagging indicators.  The leading indicators can be considered warning signs, the coincident indicators are the confirmation signs, and the lagging indicators are like that nagging cough that sticks around even after you are over a bad cold.

The lagging indicator that really caught my eye has to do with unemployment: duration of unemployment.  This is a  LAGGING … which means it doesn’t start up until the recession is already underway.  The most troubling thing is that duration of unemployment (how long until the next job is found) is one of the really straggling lagging indicator, and lasts partway through the recovery period.

So, the longer the downturn - or recession - lasts the greater chance you have of losing your job and having problems finding another.  Why in the world would anyone want to take on new debt with that possibility looming?  While I believe “Now” is always the best time to work on getting out of debt, stagflation is an even better argument for those who don’t share my disdain (or hatred) of debt.  Reduce your debt load as much as possible, because you might need the extra breathing room in your budget! 

I’m starting to sound like a true egghead, but this is what happens when college students have time off.  LOL  Besides, well-informed is well-armed, and the economic situation looks like it may be a big financial battle.