There has been a lot of comparisons between the 1980;s inflation and today.
We are not even close to being in the same situation. We’re much, much worse today. Here’s why.
Back in 1944, forty-four nations signed the Bretton Woods Agreement. That multinational agreement linked the US dollar to gold and made the US dollar the world reserve currency. Bretton Woods also set a fixed rate of exchange between other world currencies and the US dollar. That latter decision was problematic because those nations had different monetary policies than the US.
In 1971, Republican President Richard Nixon, spooked by year-over-year (YoY) inflation having reached 5.6%, decided to “fix” things. With a stroke of the pen, Nixon broke the Bretton Woods Agreement and took the US completely off the gold standard.
That made matters worse. By 1974 the YoY inflation rate reached 12.3%, a rate not seen since World War II. So, Nixon implemented a freeze on wages and prices. This is what happens when we elect politicians who think they can legislate away the laws of supply and demand, then think they can fix what they broke by breaking even more economic laws.
Another Econ 101 lesson is the fact that when you control the price of something, the less of it you get. One of the most lucid examples of this is the fuel shortage under Nixon and Carter and the resulting lines at gas stations. Under today’s grip of inflation, it’s only a matter of time until the Democrat progressives call for implementing price controls since, channeling Bernie Sanders, real price controls have never been tried.
US inflation rate reached 15% in April 1980. The new US Federal Reserve Chairman Paul Volker raised the Federal Funds Rate to 20%. His philosophy was that the Fed Rate needed to be higher than the inflation rate to curb inflation. Sure enough, inflation fell to 2% by 1986. But his decision also killed the economy: unemployment hit 10.8% and GDP contracted 2%.
Many are drawing parallels between the 1980’s and today. Currently, the Core Consumer Price Index is at 8.6%. But that understates true inflation since the predominant food and energy sectors have been removed from consideration.
Energy prices are a leading indicator of what is yet to come. If fuel prices double, then shipping costs double for everything else. Real inflation is closer to 10%.
Any useful comparison of the 1980’s with today’s situation, however, must also include several significant and ominous factors. First, the post-Covid economy is still unhealthy. GDP contracted 1.5% in the first quarter of 2022. The S&P 500 is down 20%. Companies are cutting back on new hires. All classic signs of stagflation.
Second, we have fewer workers supporting non-workers. In 1954, 98% of working age men (typically considered 25-54) were in the labor force. As of May 2022, that number fell to 89%. We have a staggering six million able-bodied, working-age men who choose not to work. What’s more, the birth rate is half of what it was when I was born.
Finally, the US is drowning in debt. Trump and Biden “printed” $8 trillion during the last three years alone. If the Senate hadn’t blocked Biden’s “Build Back Better” plan, that number would have grown another $4.5 trillion.
In 1980, the federal debt-to-GDP ratio was 35%. The official number today is 130%. That does not include Medicare (A, B, and D), Social Security, military and civilian benefits, federal debt held by the public, and more. There are $170 trillion in unfunded liabilities not included in the official debt numbers. The actual federal debt-to-GDP ratio is closer to 850%.
Our government can pay for these liabilities in one of three ways: direct taxes (the most honest way), borrowing money (selling bonds to push direct taxes into the future, essentially taxing the next generation), and via the inflation tax.
Bloomberg reports that US households are currently paying an additional $433/month to keep up with inflation. To make ends meet, there was a record surge in credit card debt last month. With this regressive inflation tax, the government takes our money by cutting its purchasing power.
A country cannot survive printing eight times as much money as it produces. In the past, politicians have started wars to fix economic woes. This time it won’t work. Given the current weaknesses I mentioned above, we are in for a hard landing.