Ah, the 1970′s. The hair was long, the music was great, and John Belushi was a rising movie star. Also unfortunately common were long gas lines (remember odd/even days?), high prices, high unemployment, and government price fixing with commodities. WIN, or otherwise known as Whip Inflation Now, was a popular grass roots movement to help control inflation by our Congress and our president at the time Gerald Ford. We know how this story ended.
During the 1970′s we also experienced a previously unheard of term called stagflation. Stagflation is when the inflation rate rises faster than real GDP. The word is a blend of the two words: stagnation and inflation.
Before this period, the always correct economists thought this event could never occur. How could a country be in a recession, yet also see prices increase? This blew the traditional Keynesian economic theory out of the water. Keynesian’s theory is mainly based upon slack in the labor force. This then determines wage inflation, which in turn increases prices for everything. So if unemployment is high (just like we are seeing today), we should not experience any measurable amount of inflation.
From the news reports we are seeing today, first quarter real GDP rose only 1.8% (July 2011 update: real GDP only grew 0.4%). This is while the annual inflation rate for that same quarter was 3.8%; the highest we’ve seen since 2008. Gold has reached an all time high of $1,800/oz. Gold’s evil stepsister, silver, will more than likely close near its all time high. Also in the news was an ‘unexpected’ increase in unemployment claims. Crude oil is currently at $85/barrel. We are getting reports from the likes of McDonald’s (MCD), Coke-Cola (KO) that they have been affected from the previous quarter’s food inflation and expect to increase pricing to keep up.
The dollar has continued its long term trend downward. Fed Chairman Ben Bernanke, in yesterday’s unprecedented press conference, stated the commodity inflation we are seeing is transitory. Ben also said the same regarding the slowdown in GDP. At what point does the trend in commodities and the dollar become a trend, and not transitory? We’ve seen inflation trends for the past two years, and the same applies to the dollar devaluation.
Are we going to experience stagflation in 2011? Since I’m more a believer of Austrian school of economics, I would have to say a resounding yes. For the curious, wikipedia has a good summary of stagflation and the various viewpoints.
July 2011 Update: First quarter 2011 GDP was revised downward from 1.8% to only 0.4%. Gold is now at $1623/oz. Unemployment is at 9.2%. Oil though is slightly under $100 a barrel.
Readers: What do you think? Do you think the inflation we are seeing is “transitory”, or something more permanent?
Disclosure: Long MCD and KO.
So are you suggesting that we will soon have another opportunity at locking up long term CDs at 13-15% like we did in the late 70′s early 80′s??
Well keep in mind…how are CD rates determined? It’s a combination of the FED and mandates by the FDIC. The Federal Reserve would have to increase rates before we could get anywhere near the high rates of that period. During that period the FED purposely increased rates to combat stagflation, and hence why you saw high CD rates.
Let also add come May probably the best “safe” investment will be I-Bonds for the next 11 months.
Isn’t there a $10k per person maximum on I-Bonds? And you’ve have to do 2 separate transactions of $5k each just to get that?
Correct (though I have seen discussions of with a trust it can be more) $5k paper, $5k electronic.
It’s per Social Security # annually.
I understand that, though it’s not quite that simple. I also understand that CD rates weren’t at 0.5% prior to the increase in the 70′s. I was merely trying to give you a little nudge so that you’d broaden your analysis to give your readers a perspective on possible investment opportunities/pitfalls within the :stagflation” scenario. After all this is “Investor” Junkie, is it not?
Ok you didn’t phrase it as such. It’s agreed stagflation does present some investment opportunities.
Remember that if CD prices are at double digit rates…so are mortgages
And house prices would drop.
We must be thinking similiar thoughs right now. I don’t know if you have had a chance to see my article posted yesterday titled: “Is Biflation Creating Global Stagflation” ).
As you point out, this is already a trend that is at least 2 years old. It could be argued it started in 2001 and created the housing bubble. Now money is going into precious metals and equites. Are they going to create another devastating bubble? The Federal Reserve continues to create inflation through printing of money.
I think stagflation is probably already here according to the definition you have supplied. I think it will only get worse until policies are reversed.
Thank you for writing on such an important subject. Maybe if more people realize where we are headed we can demand sound policies from our government!
Ken Faulkenberry
Hi Ken,
Unfortunately unlike inflation there is no set academic definition for stagflation (ie 4 quarters of inflation rate higher than GDP).
Certainly, Stagflation is here to stay, get used to The Word. multiple reasons, prices on some commodities, like food and oil (and other imortant scarce commodities) will increase. it is a long time since free and open markets (schoolbook sense) decided commodity prices, speculative investors puts a clouded layer on such trade, even small uncertainties like we see on oil is boosting prices more than what is called for. Just see how people hamster ie water in dire situations… So does traders, and they do profit on it, these darn middlemen.
Also, last years Oligopoly trends allows for sellers to Ask higher price, without too much risk, so a small increase is further boosted. Add to it that governments Print too much money and you guarantee inflation.
Stagnation is even easier to predict, fewer of us will work (check “Dependency Rate” predictions for 2050 – The Economist) and contribute to GDP, so indeed, inflation will surpass the GDP Rate for years to come…. Question is, by how much, and how dramatic.