The 1970s are perhaps best known today for being a time of stagflation – economic stagnation and high inflation. The combination of high unemployment and high inflation puzzled the Keynesian economists who made up the economic mainstream, and caused a reevaluation of concepts such as the Phillips Curve. It also confounded policymakers who struggled to respond to the stagflation, even though many of the problems were of their own making.
50 years ago this Sunday, President Nixon upended the world monetary system with his decision to close the gold window, thus severing the last official link between the US dollar and gold. That was perhaps the natural result of monetary easing during the 1960s that radically increased the amount of dollars held by foreign governments under the fixed exchange rate regime of the Bretton Woods system. It was only natural that those governments would eventually redeem those dollars for gold, drawing down the US government’s gold holdings, thus necessitating a closure of the gold window before the US lost all of its gold.
But while the closure of the gold window gets all the attention today, one of Nixon’s other actions gets far less attention today: price controls. Nixon instituted a 90-day “temporary” wage and price freeze that ended up lasting for nearly three years. And right smack in the middle of that era of price controls came the 1973 oil crisis, which combined with price controls led to major gas shortages throughout the United States.
The price controls were eventually done away with in 1974, but not without effort. Believe it or not, there were people who wanted the price controls to remain in effect indefinitely. While you’ll hear about the price controls in introductory economics courses, most Americans have long since forgotten the effects of those price controls. That means that if new proposals for price controls come forward, the number of people with firsthand experience of price controls, who could speak to just how detrimental they were, will be small.
With millions of Americans remaining unemployed and prices rising, the 2020s are starting to look like a repeat of the 1970s. This decade could end up being another stagflationary decade, beset by subpar economic growth. For investors, it could end up being a lost decade, one marked by lackluster stock market performance and a dearth of quality investments.
But one question that needs to be asked is, just how likely are price controls?
Depending on the severity and scope of price controls, they could wreak havoc on the economy. We know from economics that price controls will lead to shortages, as sellers will have no incentive to continue stocking goods that they have to sell at below market prices. But price controls are almost never simple and straightforward, and the regulations that surround them could be even more damaging.
If inflation were to rise high enough for a long enough period of time, however, there would be a high possibility that the Biden administration might try to enact new price controls.
The Effects of Price Controls
What effect would price controls have on American consumers? In large part it would be dependent on how far-reaching price controls were. But there are four major areas to look at: food, energy, housing, and wages.
1. Price Controls and Food
Economics teaches that price controls set below the market price will result in shortages. So if price controls were to be set on food, expect the shelves to quickly become barren. Prices of meat in particular have risen tremendously in many areas of the country this year. And if price controls were to be placed on meat, it might become unprofitable to continue producing it.
The short-term effect would be for grocery stores to sell out. But the long-term effects would linger too, as farmers would no longer try to raise hogs or cattle, thus diminishing long-term supply and exacerbating price control-caused supply shortages.
These same effects would likely extend to other products as well. Do you remember the shortages that ensued during the lockdowns, as people began to hoard food, not knowing when they might be able to get to the store again? Imagine that but worse, and you have an idea of how price controls might affect food supply.
2. Price Controls and Energy
The 1973 oil crisis is the template for how price controls might affect energy prices. Price controls exacerbated the effects of the OPEC oil embargo, making it worse than it might have been. But prices were already rising before the embargo, thanks in part to a two-tiered pricing system.
Oil from already discovered reserves was subject to price controls, while newly discovered oil could be sold at market prices. Thus the incentive was to diminish production from existing wells, leading to shrinking oil production, making prices even higher.
Future price controls on energy could result in similar pain at the pump, as well as painfully high utility bills. Imagine a return to odd/even-day rationing, bans on sales of gas on Sundays, or being asked to heat only one room in your house during winter.
You may have seen natural gas prices skyrocket in the aftermath of the Texas winter storms this year, as markets reacted to lower supply by raising prices. But with price controls, that might not have been allowed, and supply could have been permanently affected. If such events were to happen in the future under energy price controls, imagine being without natural gas or heating oil during the late part of winter because prices aren’t allowed to rise to allow supplies from elsewhere to flow.
3. Price Controls and Housing
Price controls on housing would likely take the form of rent control, as it would be nearly impossible to cap prices on single family homes. And most likely it would take the form of a freeze, with at most the ability to make a very minor annual increase.
As with rent control in major cities, the price controls on rent would cause rental properties to deteriorate as inflation rises. Landlords would have no incentive to make improvements or repairs, as their profit margins would be continually whittled away.
Prices on properties not subject to price controls would rise, as people would want to move out of price controlled rental housing and into higher quality homes. The effect on real estate investment would be significant too, as real estate investment trusts, mortgage-backed securities, and other financial instruments backed by or investing in real estate would see major shakeups in valuations.
4. Price Controls and Wages
Price controls on wages would probably have the most significant effect on Americans. No doubt employers would begin to try to attract workers with non-monetary compensation, but a true freeze on wages could cause a lot of harm.
Imagine not being able to save more money for retirement, or to buy a house or a car. And all the while prices would continue to rise, just as they did during the price freeze of the 1970s.
There’s no telling how damaging price controls could be if they were to be implemented today. But just because price controls don’t seem to be on anyone’s radar screen today doesn’t mean that they won’t be considered if inflation starts to get worse.
President Nixon famously denigrated the idea of price controls when he was running for office, but he was only too happy to implement them while in office, even against the advice of his advisors. Could the same thing happen today?
Protect Yourself With Gold
Price controls are, unfortunately, not an uncommon tactic to be implemented by governments seeking to address the effects of monetary inflation. When prices start to rise, governments want to deflect the blame away from themselves and their monetary actions, and blame businesses instead for being greedy. And time and again they’re successful in doing so because so many people are ignorant of basic economics.
Remember that no one last year could have predicted that every state in the country would enact some sort of lockdown. It was plainly obvious that they wouldn’t have any effect in stopping the spread of COVID, and that the economic effects would be disastrous. Yet governments did them anyway.
It’s the same with price controls. Everyone knows they’re bad and why they’re bad, yet governments resort to them anyway. And if you don’t protect yourself ahead of time, you may be hurting turkey when they go into effect.
We can’t predict just how badly price controls might mess up the economy if they are introduced. Nor can we predict how wide-ranging price controls will be. But markets may suffer nonetheless.
One of the ways investors have traditionally protected themselves against that suffering is by buying gold and silver. These precious metals have served to protect wealth for centuries, and they’re still trusted today.
Whether you want to buy gold and silver coins to sock away for a rainy day or transfer retirement savings into a gold IRA, there are numerous precious metals options available to you. Buying gold and silver can be done with relative ease, particularly when working with precious metals experts like the ones at Goldco, who can help walk you through the precious metals investment process.
Don’t be left hanging if high inflation leads to price controls. Take the first steps to protecting your wealth with gold and silver by taking to a precious metals expert at Goldco today.