Many income property investors are too young to have experienced or remember stagflation of the late ‘70s and early ‘80s. Stagflation is the worst of all possible worlds from an economic standpoint. It combines a stagnant or no growth economy with sky rocketing consumer prices. It is also one of the most difficult economic ills to cure.
How is something like this possible you ask? If the economy is flatlining and unemployment up, then demand for goods and services must be down. This should mean lower prices.
True enough if you don’t factor government spending into the equation. However, in the wake of our government ordered business shutdown, congress has flooded the market with money; $2.7 trillion and counting. This is nearly 50% more than was spent for stimulus during the Great Recession of December 2007 – June 2009. And congress has proposed another $3 trillion for various constituencies on top of this.
This tsunami of cash will increase consumer demand. This will be aided and abetted by the Fed re-running its Great Recession playbook of keeping interest rates at or close to zero for the foreseeable future.
When this heightened level of consumer demand is met by a scarcity of goods and services, price inflation will occur. This concurrent economic stagnation and price inflation is stagflation.
If this occurs, it will impact all investors and investments. This is because inflation acts as a universal tax on all earners and holders of fiat currency (government issue currency that isn’t backed by a commodity such as gold). This is because inflation inexorably erodes the value of these currencies. As time goes on, it requires more dollars not less to buy the same goods and services.
As hard as inflation will be on fiat currency and many financial assets, it has the potential to benefit holders of hard assets.
Where income property investors and DSTs are concerned, real estate, especially in low/no income tax states with fiscally sound governments which are kind to capital and business may be increasingly attractive from an investment standpoint. States like Florida and Texas could continue to lead the pack. Once again, we see the primacy of Sunbelt states in terms of wealth creation.
Whether or not stagflation becomes a reality will likely depend much on how quickly the powers that be allow their respective state to emerge from lock down. With low/no income tax red states already leading the way in this regard, they are worth considering for investors in 1031 exchange in a post Covid-19 environment.