By Irma Adelman, Berkeley School of Agricultural Economics
The present economic situation in the United States is one of stagflation — stagnant growth coupled with inflation. In addition, the US economy is in the midst of a financial crisis that threatens the stability of the entire financial system. And, unlike in most recessions, our balance of trade as well as our balance of payments continue to be negative leading to a declining value of the dollar. Currently, the rest of the world is not uniformly in the same position, but we could well find ourselves in a state of global stagflation should the recession in the US deepen.
Personal investment strategies need to adjust to take the current economic outlook into account. During periods of stagflation stocks usually decline. Bonds yield very low nominal returns. In fact, bonds currently yield negative real returns when one factors in present rates of inflation. Financial assets are therefore unattractive as well as unusually risky. This leaves real assets, and, in the short run, foreign currency.
Among real assets, the traditional major form of investment in housing and real estate holdings is unattractive, since their prices are declining precipitously, and there seems to be no end in sight. Indeed, this, together with the collateralization of mortgages and the evolution of derivatives is the basic cause of the current US financial crisis.
So, currently, the best form in which to hold savings is in tangible assets other than housing. These include, but are not limited to, precious metals, natural resources and art.
Art has exhibited a number of trends. During the past several decades, art has escalated in value. In fact, on the average, rates of returns from art have exceeded those from stocks. The biggest price increases have been for contemporary art, followed by impressionist and modern art, and by old masters.
The major names, with long established museum credentials, have withstood the test of time best and yielded the greatest price increases. Buying a nice work by an unknown artist is like going to the gambling tables in Vegas: you never know what will happen in the long run. In contrast, works by known artists of great repute have yielded the largest returns. Picasso, Chagall, Miro, Calder, Warhol, and Vasarely are just a few artists whose works come to mind.
Lastly, on a personal note, art, of course, has another advantage. Art is inspirational, and is the tangible commodity that not only increases in value but also gives visual pleasure and stimulation.
Irma Adelman, FRSA
Thomas Forsyth Hunt Chair
Professor Emerita,
University of California, Berkeley School of Agricultural Economics
Fellow Royal Society of Arts and Commerce, London
Fellow Royal Society of Arts and Commerce
Fellow American Academy of Sciences, Washington, D.C.
