Talisman Talk


June 01, 2022

Along for the Ride: Or How I Learned to Stop Worrying and Love the Market, Part 1 of 3

By Jennifer Kirby, Managing Partner, Senior Wealth Advisor |
"Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb (1964)" by twm1340 is licensed under CC BY-SA 2.0.

Part 1 of a 3-part series


Lately, every client conversation we have been having starts with, “What is happening with the market? Will it get worse?”

If you’ve followed my posts, you know what I am going to say next—the favorite phrase of honest financial advisors: IT DEPENDS.

But let’s look at history as a guide.

If you were born before the late 1960s, you remember the Great Stagflation of the 1970s. Stagflation is defined as slow economic growth, high unemployment, and rising inflation. There were many factors that caused this problem.

The Yom Kippur War of 1973 triggered an OPEC oil embargo that targeted countries which supported Israel. Then, less than six years later in 1979, the Iranian Revolution caused a massive reduction in oil production. This led to supply shocks and rising inflation. At the same time strengthening labor unions raised the cost of production through higher wages.

The byproducts: a weaker dollar, sluggish growth, significant unemployment, and searing double-digit inflation.

After WWII, the government embarked on massive spending to build infrastructure and invest in technologies. US productivity exploded. In the 1960s, Johnson’s vision of the Great Society resulted in even more spending supporting anti-poverty initiatives and the entitlement programs Medicare and Medicaid. So, it would seem logical that government investment and infusion of capital from the Federal Reserve could solve the 1970s inflation problem. But that was not the case. Government spending increased but did not create jobs or raise productivity. Quite the opposite—productivity contracted, unemployment went up, and inflation spiked harder.

When productivity stays stagnant or drops, unemployment rises, and inflation spikes, this is stagflation, caused by a phenomenon called cost-push inflation, where rising costs stay high while pushing demand and output backwards. You can’t spend your way out of a cost-push inflation cycle. The government found that out the hard way.


The End of the Great Stagflation

There are several contributing factors that get economies out of this scenario. In the case of the 1970s, one of the most important was a tough stance on monetary policy from the Fed, lead by one of the most badass Fed Chairpersons in US history, Paul Volker. He made a lot of painful, frugal, unpopular decisions that helped curb inflation over several years. He was so vilified at the time there were “WANTED” posters with his face on them. Now he is regarded as one of the economic heroes of that era.

Then, in 1980, Reagan rolled in with an optimistic vision for America, tax cuts, and deregulation. Interest rates fell by half within four years of his election, and productivity once again was on the increase. (By the end of his administration he raised taxes, increased spending, and blew up the deficit, but I digress.)

Am I saying that today is like the Great Stagflation of the 1970s? Well…. yes and no.

(Continued in Part 2)