causes of stagflation
- Threat of Stagflation Looms as Prices Rise Despite Bad Economy
- Two Easy Ways to Save Your Wealth From 1970s-Style Stagflation
Every economic report nudges the United States closer to the definition of stagflation - a condition marked by slow economic growth, high unemployment, and soaring prices.
Although many economists believe the sluggish economy will moderate inflation, that's not what happened in the 1970s.
"The belief that you can't have inflation and high unemployment is nonsense; we had 25% inflation in the U.K. in 1975, in the middle of a recession," said Money Morning Global Investment Strategist Martin Hutchinson.
Hutchinson has repeatedly warned Money Morning readers that the U.S. Federal Reserve's easy money policies would lead to inflation without fostering economic growth.
In the past couple of months, Hutchinson's fears have been realized.
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I was just a toddler, so I couldn't fully appreciate the next-generation Camaro that had just come out or the release of the new Pontiac Firebird Formula.
But of course, very few remember 1973 as the year of the Firebird or Camaro. That's because something else was brewing that would push the U.S. economy off a cliff.
An organization that most Americans had not yet heard of called the Organization of Petroleum Exporting Countries (OPEC) was about to flex some muscle, and punish the U.S. economy.
OPEC Tries to Get Revenge on AmericaIn 1973, the U.S. government re-supplied the Israeli military during the Yom Kippur war. The decision-makers at OPEC didn't like that one bit. So they decided to get even.
As payback, they significantly cut back the flow of oil to the United States.
This cutback in oil production from OPEC lasted until March of 1974. This, along with other factors, helped to slow down our economic growth while inflation soared. Up until that point, economists had said "high prices" and "sluggish growth" were nearly impossible.
But there it was: a new phenomenon known as stagflation.
With oil prices rising, corporations had to pay more to transport their goods. They had to raise prices to cover transportation costs. Suddenly everything Americans bought cost more − practically overnight.
The economy went south. Corporate profits slowed, and stocks went into a two-year bear market. Companies also had massive layoffs, and unemployment rose to 8.8%.
Meanwhile, the new fiat dollar slumped in value.
All this happened just because some oil bigwigs decided to decrease our oil supply. After all, prices only rise either because demand increases or the supply decreases (or both). In this case, it was the decreased oil supply.
These problems persisted for quite some time, too. You see, even though the oil embargo was over in March of 1974, gas prices continued to soar until March of 1981. In today's dollars, the peak price was equivalent to $3.41.
Back in the 1970s there wasn't much the average person could do to fend off the effects of stagflation on their personal finances. Americans either had to sit in cash or watch their stock portfolios bleed money.
Same Stagflation, Different MarketToday's markets are shockingly similar to the 1970's stagflation. We have the same sluggish growth, and the same rising prices.