How Stagflation Came To Be

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How Stagflation Came To Be
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In the 1960s, the US government focused on creating new policies to lower unemployment and revitalize economic growth. Unfortunately by 1970, the US economy was suffering from lower GDP, high inflation, and significant unemployment. Usually, when unemployment is high, inflation rates are low. However, this was not the case that year. As a result, this economic stagnation created a new dilemma economist hadn’t yet seen. This problem was dubbed “stagflation”.

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Efforts To Control Stagflation

President Nixon’s administration attempted to curtail this economic issue. First, the government reduced consumer purchasing power, which increased unemployment. Second, the president stimulated the money supply and created new jobs. Despite these austerity measures, inflation rates increased to record levels.

In 1971, President Nixon took the US dollar off of the gold standard. Coupled with surging debt from the Vietnam War, increased public spending, higher inflation, and rising unemployment rates, the US economy began to freefall. Consequently, Nixon implemented price and wage freezes, lowering inflation by 1 percentage point. However, Nixon did away with the austerity measures soon after, resulting in an increase in inflation rates again.

In 1974, the global economy faced an even bigger issue. An oil embargo set by OPEC crushed the economy. As Inflation reached 12%, the new president, Gerald Ford, raised interest rates and cut government spending. Unfortunately, this new approach had little effect on improving the stagflation predicament.

In 1977, Jimmy Carter was elected president. By then, unemployment had hit 7.4 percent. President Carter expanded the money supply and introduced major spending initiatives. It had little effect, however, seeing as inflation reached 13.3% by 1979! Consequently, the Fed cut down the money supply and increased interest rates dramatically. This resulted in the highest unemployment rate in recorded US history, reaching 10.8 % in 1982.

Deregulation

Ronald Reagan became president in 1981. As a believer in “Austrian economics”, he lowered taxes, reduced government intervention, and deregulated the stock markets. This strategy led the economy out of a deep recession and lowered inflation.

The 1980s was a financial roller coaster ride, with the US economy experiencing both booms and busts. Even though deregulation helped bring the US economy out of stagflation, this method wasn’t without its faults; Income inequality grew and the national debt tripled.

New Stagflation Threat Looming

The Federal Reserve has flooded the market with an extraordinary amount of dollars due to COVID-19 pandemic stimulus bills. On top of that, the cost of living is rising, high unemployment lingers and GDP continues to shrink. Economists, both in the public and private sectors, are faced with similar stagflation dilemmas of the past. Will they make the same mistakes that were made in the 70s and 80s? One can only hope that policymakers can pull the right levers to fix our economic situation. The best thing one can do is prepare for the worst – by hedging against inflation.

Gold, Silver, And Bitcoin Beat Out Inflation

For generations, gold has been the metal of choice for those wanting to protect their wealth against inflation. When inflation rates go up, so does the value of gold. Recently, we have seen an investment comeback for gold, silver, precious metals, and cryptocurrency during the COVID 19 pandemic. As people continue to worry about the state of the economy, precious metals and cryptocurrency growth show no signs of slowing down. We might not know what the inflationary outcome will be, but at least we have options like gold, silver, platinum, and palladium to help the devaluation of the dollar.

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Eric Gozenput founded Bullion Exchanges at the age of 27 and has been featured in places such as Fox Business News, Forbes, Reuters, Seeking Alpha, Value Walk. Eric maintains that precious metals are vital for investment portfolios and that investing in precious metals should be convenient, transparent, and secure. Before beginning his business in 2012, he began his career at Merrill Lynch as a Financial Advisor, then transitioned into working at a Hedge Fund as an International Trader for six years. Today, Bullion Exchanges has grown to become one of the largest precious metals dealers in the world that buys and sells physical precious metals and numismatic coins online and in-person at our location in the Diamond District of NYC.
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