Are We About to Experience Stagflation Redux?

Are We About to Experience Stagflation Redux

The 1970s were an economically awful decade.

I was born in London in 1971. So, I was sheltered from what it was like to be a working adult during that decade.

But my parents couldn’t shelter me from the rolling blackouts that swept across the United Kingdom... The bare shelves in the supermarkets… Or the constant refrain of “we can’t afford that.”

What I remember of the 1970s is every adult complaining about the price of food and gas. My grandmother would tell me stories of how she used to be able to buy five chicken legs for 20 pence. Now, they were 20 pence each.

In the United States, things were no better.

Inflation averaged 7.1% per year throughout the decade of the 1970s. Like the UK, the States had high gas prices, high inflation, high unemployment, and lousy-to-no growth.

Economists coined a term for this period: Stagflation. It was the marriage of a stagnant economy and inflation.

In the 1970s, runaway inflation pushed real rates all the way down to -4.9%. Real rates are simply the nominal interest rate minus the inflation rate. It reflects the changes in purchasing power.

When real returns go negative, smart money flees bonds and paper money as they drop in value.

Instead, they seek protection. In the past, that was gold, which rises in value and offsets the losses from holding paper money.

During the 1970s, gold prices rose from $35 per ounce to over $543. And gold stocks did even better. The Barron’s Gold Mining Index shot up almost 500% from 1970–74.

As I wrote last week, today I’m seeing a lot of parallels to the 1970s.

And just like people bought gold to protect their buying power in the 1970s, I believe they’ll buy bitcoin to protect their buying power through the end of this decade.

The Silent Lurker Pushing Inflation Higher