Are we bringing back the 70s?
These days, many of us look back at the 1970s with an eye toward nostalgia. The decade is now fondly remembered for great music, the Golden Age of television, Studio 54, and in many ways, a simpler time where a middle class still thrived. Of course, we forget about social unrest, violence, Watergate, the losing end to our war in Vietnam, and inflation.
Many Americans either weren’t born or are too young to remember what a great problem inflation was during the 1970s. The scourge of inflation had gotten so bad that the Federal Reserve itself seemed to be, until 1979, powerless to stop it. Meanwhile, the federal government launched perhaps one of the silliest solutions to a serious problem ever when they came out with WIN buttons (“Whip Inflation Now”) for everyone to wear.
The history of the late 1960s and 1970s tells us that financial markets do not respond well to persistent inflation. During this period, interest rates stayed stubbornly high and stocks were more or less in a bear market. So how did the United States—the symbol of economic power and stability in the post-war era—fall into such a precarious condition?
When people studied economics back in the 1970s and 1980s, there was a popular question as to whether an economy could sustain higher military spending (“guns”) and higher societal spending (“butter”) at the same time and not exhaust the economy’s limited resources and thus, cause inflation wherein “too much money chased too few goods.” In the 1960s and early 1970s, the United States decided to test this theory out and, sure enough, the theory was right!
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