When you hear the term “lost decade” you think of Japan, and the period of time after the country’s meteoric rise in the 1980s. From about 1990 onward, the country fell into a recession. Growth stagnated, asset prices collapsed, and the country seemed to lose its direction. In many respects Japan suffered from lost decades, and has never really returned to the pinnacle of economic greatness.
The United States suffered its own lost decade in the 1970s, a decade that has become almost synonymous with stagflation. After markets had boomed from the 1950s into the 1960s, they largely stagnated from 1966-1982. Inflation became problematic in the 1970s, peaking at 11% during the decade and even higher in the early 1980s until Paul Volcker decided to put his foot down and end runaway inflation.
Along with inflation came high unemployment and economic stagnation, something that wasn’t supposed to happen according to the economic orthodoxy of the day. And thus was born the term “stagflation,” combining stagnation and inflation.
While the experience of the 1970s is often brought up as a cautionary tale, it seems that many people have forgotten just what got the US into stagflation in the first place. And as a result, we may discover that the 2020s could end up being another stagflationary lost decade.
Japan vs. the US: The Similarities
The lost decades of Japan and the United States have similar origins, namely in money creation through the influence of central banks. Both the Federal Reserve and the Bank of Japan created the illusion of economic growth through massive amounts of money creation.
In the US, the M3 money supply doubled during the 1960s, then accelerated during the 1970s so that the money supply in 1980 was five times what it was in 1960. It’s no wonder that inflation got so high.
Japan experienced something similar, with its central bank driving up the money supply 2.4-fold during the 1980s. Then it abruptly tried to squash the massive asset bubble that it had created, plunging the economy into recession.
The Bank of Japan’s response to that was something that Americans became familiar with post-2008: quantitative easing.
Japan’s experience with QE was horrendous, with monetary stimulus doing absolutely nothing to help the Japanese economy recover. And yet despite that, the Fed decided to use QE in its response to the 2008 crisis. Go figure!
The inflation that ran rampant in the 1970s up to the 1980s in the US was finally quashed by Paul Volcker’s Fed which, depending on who you talk to, either tolerated or caused a recession in order to bring prices back under control. The recession was severe, but it worked in reining in inflation, and the post-1982 stock market boom that proceeded after that was one of the biggest in history.
Factors Leading to a Lost Decade
The US economy is facing a number of headwinds right now that could result in the 2020s becoming a lost decade. First and foremost among them is inflation.
The latest inflation numbers not only didn’t drop to where the consensus had pegged them at, they actually exceeded them. Inflation month on month was at 1%, while year on year inflation was at 8.6%.
That’s incredibly concerning, because it means that despite the Fed actively tightening monetary policy and raising interest rates, inflation is still increasing. So nothing the Fed has done thus far has helped in any way, and the Fed will likely have to boost interest rates even further and faster in order to try to keep inflation under control.
We’re also starting to see very concerning signs from numerous industries. There are reports that large retailers are seeing consumer demand fall, perhaps a sign that consumers are running out of money to spend, or that prices have risen too high for most people to afford.
Credit card balances have rebounded, while personal savings rates have fallen. And those companies that are still doing booming business, or trying to, are still having significant issues attracting and retaining employees. Couple all of that with continuing supply chain issues in many industries, and you have a recipe for continued economic stagnation this year.
GDP already fell in the first quarter of this year, and another fall this quarter would put the economy officially into recession. And if the economy falls into recession, how likely is it to recover and what would that recovery look like?
Reversion to the Mean
If you’re familiar with financial theory, you’ve probably heard mention of reversion to the mean. That means that asset prices and returns on investment tend to eventually revert to the long-term mean or average.
Thus if the economy is in a period of stagnation, you would expect things to eventually pick up and return to long-term growth levels. And if the economy is overheated, you would expect it eventually to slow down to long-term growth levels.
If you look at the performance of markets over the past 100 years, you certainly see a lot of this. We all remember reading about the “Roaring ‘20s” in school, followed by the Great Depression and World War II. Markets really didn’t recover fully until the 1950s, and took off until the mid-1960s.
From about 1966 to 1982 we reached another point of stagnation, characterized by the stagflation of the 1970s. Then from 1982 to 2000 we had an amazing boom time, finally ended by the bursting of the dotcom bubble.
Growth from 2000 to the present hasn’t been nearly as substantial as that 1980s and ‘90s boom, and it’s largely the result of post-dotcom bubble growth, spurred by the Fed’s loose monetary policy that created the housing bubble, and the post-2008 recovery that really didn’t kick into high gear until 2016.
So we’ve had about six years of above-average growth, punctuated by the government-caused recession in 2020. By just about anyone’s expectations, we should be do for another downturn. The only questions are, how long will it be and how severe will it be?
Visions of the Past and the Future
As things stand right now, it looks far more likely that the 2020s will end up as a repeat of the 1970s. Older investors and commentators who experienced stagflation have noted the many similarities between then and now.
One common element also seems to be a Federal Reserve that doesn’t understand what it has done and what it is currently doing. And right now the Fed is the biggest wild card around.
Much of the growth of the past several years has been fueled by the Fed’s loose monetary policy, and now that that has come to an end and tightening is the name of the game, recession seems all but certain. The issue we have to deal with now is whether the Fed will tighten excessively and exacerbate the severity of a future recession.
Part of the problem of the lost decade of the 1970s is that the Fed didn’t know what it was doing and had no solution to the problem of stagflation. It’s highly unlikely today that a Federal Reserve that: 1.) failed to acknowledge inflation was occurring, and then; 2.) tried to label inflation as transitory will have any more success than its 1970s iteration. And that could spell trouble for American households and investors.
Millions of Americans are now highly aware of inflation, and have stated that it is their number one concern when it comes to the economy. And many Americans have already started to take steps to minimize the impact inflation is having on them.
For some, this takes the form of protecting their savings with precious metals like gold and silver. Many have chosen to protect their retirement savings with a gold IRA. A gold IRA allows you to own physical gold and silver coins and bars while still enjoying the same tax advantages as a conventional IRA. And you can fund a gold IRA with a rollover or transfer from a 401(k), 403(b), IRA, TSP, or similar retirement account.
Other people prefer to buy gold and silver coins that they can store at home, another popular option when it comes to buying precious metals. The choices here can be nearly endless, and new coins are being produced around the clock around the world to meet booming purchase demand.
Whether you’re new to gold and silver or just looking to expand your precious metals portfolio, Goldco has something to offer for everyone. With over a decade of experience, established relationships with mints around the world, and thousands of satisfied customers, Goldco goes the extra mile to make sure that you’re happy with your precious metals purchase.
Don’t let this decade become a lost decade for your hard-earned wealth. Call Goldco today to talk to one of our experts and learn more about how gold and silver can help you safeguard your savings.