3 Reasons Stagflation Could Return

More than anything else, stagflation defined the 1970s. The portmanteau of stagnation and inflation was an economic catastrophe that completely dumbfounded the mainstream economic establishment at the time.

The idea that an economy could have simultaneous high inflation and high unemployment was a complete shock to a generation of economists who had grown up taking the idea of the Phillips curve as gospel truth.

As a result, the US economy floundered throughout the 1970s and beyond, as Federal Reserve policymakers found themselves ill-equipped to deal with the phenomenon of stagflation. And it wasn’t until Paul Volcker took the helm of the Fed and undid the misdeeds of his predecessors that the economy returned to some semblance of normalcy.

The lessons from that era, however, have been forgotten by policymakers today who place too much trust in their own ability to parse economic data and react to changes in the economy quickly enough. And so the possibility that the US economy could fall into another stagflationary episode is growing.

After decades of economic growth and moderate inflation, entire generations of Americans have grown up expecting low inflation and constant economic expansion. But there are three big reasons stagflation could be returning, disappointing those expectations.

1. Stubborn Inflation

The first and most obvious reason stagflation could be returning is the fact that inflation has been remarkably stubborn. Although it’s lower today than it was a couple of years ago, that doesn’t mean that the Fed has whipped inflation yet.

If you look at inflation figures from the 1970s, you’ll see that inflation rates were like a roller coaster, climbing up, then falling, then climbing even higher, etc. It wasn’t until the early 1980s that that vicious cycle was finally brought to an end.

The Fed today seems not to understand that it may be facing a similar cycle.

First we heard that inflation wasn’t happening. Then we heard that it was transitory. Then we were told to trust that the Fed would bring inflation under control.

And what happened?

Inflation came down, but never to its pre-pandemic levels. The amount of money that the Fed pushed into the financial system to fund the government’s fiscal stimulus was so massive that we’re still feeling the effects of it.

Inflation has started to climb again, and once again the Fed seems to be behind the curve. Rather than aggressively fighting to bring inflation down, the Fed has started to end its balance sheet drawdown, something that could allow inflation to continue rising.

One of the problems with inflation throughout the 1970s was that once it became entrenched, inflation expectations increased and consumer behavior changed accordingly. Once those expectations change and that behavior changes, it can be very difficult to counteract.

The risk today is that the Fed won’t get ahead of inflation, consumer behavior will change, and those patterns of behavior will become entrenched, making the Fed’s inflation fight doubly hard.

2. Stagnating Productivity

While most people point to GDP as a sign of economic growth, that’s misleading. Government spending is a major factor of GDP, which skews those figures.

With a government that is continuing to run up the national debt and run multi-trillion dollar budget deficits each year, no one in their right mind would think that rising deficit-fueled spending should be treated as a sign of economic growth. Yet it is.

If you look at actual industrial production, it has been largely stagnant for the past two years. In fact, current industrial production indices are right now at about the same level they were right before the 2008 financial crisis.

The fact that US industrial production really hasn’t seen any growth in over 15 years is scandalous. Yet it’s an indicator that not all is well with the US economy.

Even though the US is transitioning to a service economy, industrial production remains a vital component of the economy. And if productivity continues to stagnate, it could be a major warning sign for the economy.

3. Clueless Leadership

What really binds these two factors together is the third factor, which is leadership that is either unaware of the problem or unwilling to face the problem. The Federal Reserve throughout the 1970s was helmed by men who could be charitably described as incompetent.

Succeeding longtime Chairman William McChesney Martin in 1970, Chairman Arthur Burns led the Fed from 1970 to 1978. His tenure was marked by political pressure and policy missteps that led to the high inflation that characterized the 1970s.

Burns’ unwillingness to stand up to President Nixon’s wish for easier monetary policy, as well as his unwillingness to question Keynesian orthodoxy, resulted in runaway inflation that characterized the 1970s as a decade beset by rapid and unpredictable price increases.

Burns’ successor, William Miller, wasn’t any better. Lasting only 17 months, Miller’s tenure is regarded as the worst of all Fed chairmen.

Miller’s unwillingness to confront inflation, and his insistence that raising interest rates would make inflation worse, meant that inflation continued to rise unabated. And it required his successor, Volcker, to force shock therapy that caused a recession in order to keep inflation under control.

Current Fed Chairman Jay Powell was in law school and starting his legal career during this period, so how much of it does he remember? Has he learned the lessons of Burns, Miller, and Volcker? Or will he repeat the Fed’s mistakes that cause the 1970s to become a decade most would rather forget?

So far, the signs aren’t good. Powell misread inflation a few years ago and seems to be downplaying its problems today. If he doesn’t step up strong like Volcker did, the next several years could be difficult ones for the economy.

Protect Yourself Against Stagflation

Many people in this country feel that they are at the mercy of the powers that be, at economic factors that are beyond their control. They may feel that there’s nothing they can do to protect themselves against worsening inflation or stagflation, and they may be tempted to throw up their hands in defeat.

But that’s not necessarily the case. And taking steps today to protect yourself could pay dividends in the future.

During the 1970s stagflation, economic performance was stagnant and stock markets rode a roller coaster of ups and downs, with the 1966-1982 time frame being one of nearly no overall growth. But there was something else that performed well during that period of stagnation.

From January 1970 to December 1979, the gold price grew at an annualized rate of over 30% per year, growing nearly 15-fold over the decade. Even a single year of those types of gains is considered phenomenal, but a decade of it is almost unheard of.

Many Americans have put their trust in gold again today, hoping that if the US economy enters another era of stagflation, the gold price will increase just as it did back then. With a track record like that, there’s certainly a strong reason to hope.

Whether it’s through a gold IRA or just purchasing gold coins to store at home, there are numerous ways to buy gold in order to put it to good use in protecting your financial well-being. And with over $2.5 billion in precious metals placements and over 5,000 5-star reviews from our satisfied customers, Goldco can help you do that.

Our experienced representatives and IRA specialists have helped thousands of Americans through the gold purchase process, and can answer any questions you have about cash purchases of gold, how gold IRAs work, or what kind of options you have when buying gold coins or gold bars.

If you’re worried about the possibility of stagflation, if you’re worried about how rising inflation is taking a bite out of your savings, or if you’re worried about losing money during a recession, now is the time to start thinking about gold. Call Goldco today to learn more about how gold can help you protect yourself against stagflation.