The Return of the Dreaded “S” Word

If you’re under the age of about 60, you’ve never experienced stagflation. Back in the ’70s, everyone experienced what happened and people spoke openly about it. The term itself — “stagflation” — was a shorthand term to describe what was clearly and painfully a broad, national economic unwind.

Throughout the decade, the rate of inflation crept up and people saw it in daily life. Food became more expensive, as did gasoline, and certainly housing. Meanwhile, entire swaths of the legacy U.S. economy began to contract, particularly in job-rich, good-paying industries like steel and other metals, machine building, heavy equipment, autos and much more.

It was a shock to many Americans. For 25 years after World War II, and certainly through the 1950s and ‘60s, America experienced a generally solid economy. Energy was cheap, jobs were plentiful, wages grew. The country built interstate highways and much else, and, as the saying goes, “put a man on the moon.”

But then came the 1970s when things changed massively within the U.S. economy, as if the economic train was leaving the rails. In so many ways it seemed that stagflation was relentless, and nearly unstoppable.

Much of the problem was rooted in the 1960s, a decade of vast U.S. government overspending under President Lyndon Johnson for both the Vietnam War abroad and the so-called “War on Poverty” at home.

Frankly, both wars were expensive, society-wrecking disasters. Politically, and from a fiscal standpoint, Johnson’s dumpster-fire presidency was all about the federal government spending immense sums of money on big things that caused much harm and yielded little to no return.

And due to Johnson’s feckless, down-the-drain spending of the 1960s, the country’s money supply grew well beyond the productive capacity of the economy, and hence over time the rate of inflation crept up.

Then when Richard Nixon became president in 1969, he (and Congress, absolutely) continued the spending trends. One key moment in the sordid saga of overspending was Sunday evening, Aug. 15, 1971, when President Nixon went on national television to announce his policy to control inflation.

He imposed so-called “wage and price controls” across the economy, as well as closed the “gold window” of the Treasury. In essence, with the stroke of his presidential pen, Nixon froze the American economy in place.

He replaced the free market with government controls, particularly in terms of what wage levels people could earn and what prices businesses could charge for goods and services. In other words, Nixon strangled price discovery, a concept that is intimately related to proper allocation of the nation’s resources.

All this, and Nixon disconnected the U.S. dollar from its global relationship with gold, an arrangement that dated back to 1944 and the Bretton Woods Agreement. In terms of cause and effect, it’s fair to say that not all impacts occur immediately; just as not all carelessly tossed cigarette butts kindle a forest fire.

So on Monday morning, Aug. 16, 1971, life went on in America and the world. People bellyached about frozen wages and prices, and international trade continued despite the disconnect of the dollar from gold. But the die had been cast.

Over time, and now unmoored from its historic connection to something fixed and immutable like gold, the U.S. dollar became America’s Monopoly money, so to speak. Over time the dollar went from its 1971 level of $35 per ounce of gold, to the current level, recently over $2,400: a move of about 70x.

At the same time, federal spending began its inexorable climb upward, as did many other societal trends that rely on easy money, in which the value of each dollar is tied to nothing really tangible.

In 1971 the total federal budget was in the range of $250 billion in then-dollars, which included a substantial defense budget and even that abovementioned land-a-man-on-the-moon program. Now, in 2024, federal spending is moving rapidly toward $8 trillion, a factor of 32x over half a century.

This huge, unending, 50-year, upward-sloping move in government outlays does not truly reflect the country’s primary economic growth. No, it’s more an echo effect from that massive, long-term expansion of money supply, accompanied by the constant shrinkage of the inherent value of the dollar.

That is, the U.S. government has grown hugely over the decades, and year after year requires more and more dollars to perform the same kinds of tasks.

Meanwhile, the national economy has transformed, courtesy of all those easy-to-create dollars of our collective money supply. Certain kinds of assets inflated in price, like real estate and housing, or high-end art, and certainly the stock market.

As a nation, we’ve all come full circle, in a sense. From the stagflation of the 1970s, we are now again back in stagflation, this time the 2024 sequel. America’s young people have difficulty finding meaningful, productive work, let alone a personal identity in a world that has become a fetid swamp of insipid, mind-numbing, social media bubbles.

All of this has been decades in the making, to be sure, with many sets of fingerprints scattered across the scenes of many economic crimes. But helpfully, in a perverse sort of way, the Biden administration seems to relish taking credit for what’s happening out there and has even coined the term “Bidenomics” for us.

So what can we do to get through this mess? The usual advice pertains:

• Stay out of debt, especially debt that carries high interest rates…

• Hold at least some cash (find your comfort level) in your “hip pocket,” so to speak, to take advantage of opportunities

• Hold real estate, but only in the right location-location-location

• Hold shares in solid, well-run industrial companies that have strong reputations and protection for intellectual property

• And preserve wealth with hard assets.

As for those hard assets, begin with precious metals, particularly gold and silver, but also platinum and palladium.

The bottom line is the stagflation economy has staged a comeback. Let’s hope it’s not as devastating as the 1970s version, but one way or the other you want to protect yourself and ensure your financial stability.