Page 5 - Inflation -The Killer of Your Retirement Savings

What Happened During the 1970s?
The stagflation of the 1970s shocked the country, and it really shook up the economics profession. Keynesian economists were floored by the fact that both inflation and unemployment were rising, something that the Phillips curve posited wasn’t possible.4 But other economists such as Milton Friedman predicted the stagflation,5 as they weren’t wedded to the Phillips curve’s oversimplification of the relationship between inflation and employment.
Friedman believed that any relationship between inflation and employment could only occur in the short run, so that while higher short-term bouts of inflation could boost employment in the near term, over the long run there would be no positive effect on employment.6 Today we could be seeing a return to 1970s-style stagflation, with all the dangers that brings.
The unemployment rate at the beginning of the 1970s was just under 4%.7 It quickly rose to 6%, peaked at 9% in 1975, and remained around 6% by the end of the decade. The rate of inflation rose too, starting the decade at around
6%, moving to over 12% by the end of 1974, dropping back to 5% in 1976, and rising back to over 13% at the end of the decade.8 It was a riddle that befuddled government officials and policymakers.
And how did investments perform during that era? If you were invested in stock markets, your performance wasn’t that great. The S&P 500 grew from 93 points at the beginning of 1970 to just under 108 points at the end of 1979,9 an annualized growth rate of about 1.5%. With inflation being so high, real returns were deeply negative. Talk about losing money to inflation.
Precious metals, on the other hand, performed far better. Gold began the decade at around $35 an ounce, and ended it at $524 an ounce, an annualized growth rate of 31%.10 Silver’s growth rate was even better, with an annualized rate of growth of over 33%.11 Even adjusted for inflation, both of those growth rates were over 20% annualized over the course of the decade.
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