It's The 1970s Again!

Published in Investing on 3 April 2012

No water. No petrol. But no stagflation -- yet.

What's this? Queues at the petrol pumps. A drought across half the country. Strikers threatening to bring down the government. It could be the 1970s all over again!

The decade is often celebrated for the awfulness of its fashion: flared trousers, cheesecloth shirts and platform shoes -- and that was just the men. And it had the hottest and driest summer -- 1976 -- of the century. In some parts of the country, domestic water supplies were cut off and housewives queued to fill buckets at stand pipes in the street. There were still housewives in the 1970s.

But the decade also saw most of the developed world suffer its worst economic performance since the Second World War. It was marked by the phenomenon of stagflation, a pernicious cocktail of inflation, stagnant economic activity and high unemployment.

In the UK, inflation peaked at just under 25% in 1976, while the economy was shrinking. Strikes and other industrial action added to the malaise, culminating in the 'Winter of Discontent' in 1978-79, which ushered in the Thatcher revolution.

Oil shocks

Conventional wisdom has it that the root causes of stagflation were the oil shocks of 1973 and 1979. Both had their origins in the Middle East.

In 1973, Egypt and Syria launched a surprise attack against Israel (the Yom Kippur war) with the aim of regaining territory Israel had occupied since the 1967 Six Days War. President Nixon's decision to provide arms to Israel led to the Organisation of the Petroleum Exporting Countries (OPEC) imposing sanctions against the US and other Western nations. Oil prices rocketed.

The 1979 crisis followed the Iranian Revolution when the Shah was deposed by Ayatollah Khomeni and President Jimmy Carter imposed sanctions on Iran. It continued into the 1980s as the ensuing Iran-Iraq war disrupted production in the region.

Bretton Woods

But some economic historians see the problems originating closer to home. The cost of the Vietnam War and the first trade deficit of the 20th Century had US inflation running at nearly 6% by 1970. Nixon responded with wage and price controls, and by taking the dollar off the gold standard in 1971, effectively ending the Bretton Woods Accord.

That led to a massive devaluation of the dollar. OPEC sought to maintain the oil price in gold terms, and the price hikes of 1973 effectively achieved that.

Nixon is also blamed, by monetarist economists, with pressuring the Federal Reserve to keep interest rates too low for too long, fearing a recession in his re-election year. When wage and price controls were removed, double-digit inflation ensued.

UK

Wage and price controls were also Prime Minister Edward Heath's response to inflation at the start of the 1970s. That led to massive industrial unrest, with nine million working days lost to strikes during his tenure.

The miners' strikes of 1972-74 gave rise to the three-day (working) week as electricity supplies were rationed. The economy collapsed into recession in 1974 with output falling over 3% while inflation was running at around 15%, and Heath lost the general election to Harold Wilson.

In 1979 widespread strikes in the public sector did for the Labour government, then led by James Callaghan, with rubbish famously piled in the streets and coffins going unburied in Liverpool after a gravediggers' strike. Margaret Thatcher led the Conservatives to victory in the 1979 general election.

Phillips curve

The 1970s stagflation confounded the prevailing Keynesian economic theory that held high inflation and high unemployment to be mutually exclusive. In a relationship described as the 'Phillips curve', inflation was supposed to fall if unemployment rose, and vice versa. That led to the rise of monetarist economists, who placed much more emphasis on managing the money supply.

There is some consensus now that stagflation is caused either by a severe external shock on the supply side of the economy, such as the oil price hikes or by economic mismanagement.

Could it happen again? With the world wrestling with how to respond to Iran's potential nuclear capability, and the eurozone held together with a piece of string, there's a couple of good candidates for future external shocks.

Unprecedented low interest rates, massive debt overhang and a decade of austerity measures yet to bite, together these create enough novelty in the economic environment for policy makers to be able to get it wrong.

Too much is different from the 1970s to draw any direct comparisons. But too much is similar for us to be complacent. Those who envy the generation that grew up in the 1970s should be thankful things are different now -- and not just because of the flared trousers...

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Comments

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CunningCliff 03 Apr 2012 , 5:10pm

For the record, the rebound from our latest recession has been slower and shallower than the bounce-back of the Seventies. In fact, it's been slower and shallower than the rebound after the Great Depression!

See: http://www.bondvigilantes.com/2012/03/28/uk-economic-recovery-worse-than-great-depression-and-no-sign-of-improving/

This graph shows this clearly:
http://www.bondvigilantes.com/wp-content/uploads/2012/03/UK-economic-slump-worse-than-Great-Depression.jpg

Yikes!

Cliff

Badgerd 03 Apr 2012 , 9:35pm

And the Liberals were (briefly) supporting a minority government too …

UncleEbenezer 03 Apr 2012 , 11:15pm

Perhaps we're currently at about the early 1970s, with a bunch of problems but powers-that-be that talk the talk but are far too timid to do anything substantial. Things will have to get worse before we'll tolerate another real leader like Thatcher. Or like Attlee before her ...

Clitheroekid 04 Apr 2012 , 6:20pm

Those who envy the generation that grew up in the 1970s should be thankful things are different now

I beg to differ!

For the generation of baby boomers the 1970's were a wonderful time. Property was increasing in value by 20% a year but mortgage rates were only around 8%. Consequently, the real value of the mortgage debt was disappearing at a rate of knots.

This was what enabled so many people to keep trading up, and they're now living in houses that people on an equivalent income these days can only dream of living in.

Friends of mine who were teachers and policemen in the 1970's and 1980's and who are now retired are living in houses worth over £500k with no mortgage. There is no way on earth that the average teacher or policeman these days can have any real hope of emulating them.

For most people in those days inflation didn't matter that much, as their salaries rose to match. I recall my parents regularly getting pay rises of over 20% in the 1970's. For them, inflation was just a minor inconvenience, and infinitely outweighed by the advantages of debt destruction.

So nostalgia for the 1970's is entirely rational for many people. In fact, it was probably the only time ever that the default position of the consumer being screwed by the financial institutions was for one brief, shining moment thrown into reverse.

Happy days indeed!

coolwil 04 Apr 2012 , 10:54pm

Clitheroekid
The seventies were only a ten year period in the life of a baby boomer who had already lived through the post war austerity years of the fifties, and yes they were really austere times. Funnily enough I can't remember people moaning too much, or come to think of being unduly unhappy. The sixties started to come together nicely but wages were not particularly great and an ordinary worker had a hell of a job to be considered suitable to service a mortgage.The early seventies were hit by the massive oil spike which literally knocked the confidence out of the ordinary working bloke as regards to taking on excessive debt (I know).It was indeed a time of great uncertainty and doubt for most people. So I don't accept your "they had it good"line of thought. To the majority of us going to a university was just a total pipe dream and then followed by a gap, year totally out of the question.
You live in time frame you were born in and have to deal with the problems that life present you with. My father was a young married man in 1930 and had to spend ten very hard years trying hard to find and keep a job to exist.Not much state support then. My uncle was a 21 year old airman in 1941, he didn't make it to 22.
Just a couple of examples for you of how people can and do cope with the vagaries that life throws at you. Deal with it.

TRhere 05 Apr 2012 , 12:30pm

Clitheroekid,

You're quite right that 1970s inflation worked to the advantage of people whose salaries kept pace with it and who had mortgages. But it was different for others, such as those on fixed incomes. Inflation creates winners and losers.

Tony R

carloswhizz 05 Apr 2012 , 4:01pm

Well said coolwil. The more I hear from my parents (born 1937 and 1940) the more I respect the lives that they have led, the choices that they have made and the opportunities that they have given us. The 40s, 50s and early 60s were not dream times. A bit of the swinging sixties may have been fun but they were mostly in London. Let's not romanticise.

Wrighti 05 Apr 2012 , 7:34pm

it was different for others, such as those on fixed incomes.

Too right Tony. A couple of my great aunt type relatives retired on comfortable annuity pensions in the sixties. By the mid seventies, inflation had reduced them to a level close to poverty. This is why I will never ever buy any kind of pension that involves a compulsory annuity at the end. These products would be criminal fraud if they weren't mandated by Government.

A high yield portfolio is far more likely to support you through the coming inflationary/stagflationary times than an annuity.
Iain

bluecharmfishing 11 Apr 2012 , 9:21pm

have just bought exillon enrergy @£1.25 drilling for oil in russia .highest was £4.60 opinions welcome

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