![]() The punishing rate hikes of the late 1970s and early 1980s did more than choke demand and bring inflation down to bearable levels. How it got better – the “Great Moderation” Eventually in 1980, and again in 1981, Fed chairman Paul Volcker hiked US interest rates to 20% and stock market valuations fell to levels last seen in the Great Depression. Apart from a few notable exceptions, like Germany and Switzerland, most central banks dithered in the 1970s and allowed inflation to take hold, which meant that the ultimate cure would be much harsher and more economically destructive. While it’s natural to compare this to the current crisis, the ten-fold increase in the price of oil during that decade is far beyond what we’re experiencing now.Īnother familiar feature was the perceived lack of willpower to fix the problem. Sound familiar? Of course, the biggest driver of inflation, the energy crisis, did come in the 1970s. Many of the root causes began in the 1960s when governments and central banks pushed expansionary policies in the face of tight labour markets and expensive stock markets. The 1970s have a terrible reputation for investors, due to the decade’s negative real returns for both stocks and bonds, but as usual, the reality wasn’t that simple. Where it all went wrong – the stagflationary 1970s ![]() We focus mostly on the United States, as it’s the biggest economy and market in the world, with the most important currency and most powerful central bank, the Federal Reserve or “the Fed”. To do this, we look back to the decade where everything last went badly wrong – the 1970s. To figure out where we may be headed, it’s useful firstly to understand how we got here. ![]() Economists can debate the rights and wrongs of central bank policies, but most investors look at the fallen markets and scratch their heads – are there any reasonable returns to be had, or is it all just risk ahead? Even if markets recover and asset returns are ok, will inflation eat up all the gains? In other words, is the “Goldilocks” era of not-too-cold growth and not-too-hot inflation over?
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