- Yes, dad. I know,
but the mortgage rates are crazy right now.
And the shampoo I use for my luscious new locks
has gone up a whole dollar.
What do you mean who cares?
Ugh, I gotta go.
- What was that about?
- I was just on the phone with my dad.
I'm trying to find some economic sympathy.
He said, well, back in my day,
I had to pay 8000% on my mortgage.
Doesn't he see that lots of terrible things are happening?
- Well, he lived through a pretty tough economy
between the 70s and 80s.
High inflation, supply chain issues,
tension with the Soviet Union, shocking gas prices
and ballooning interest rates, which would eventually lead
to the worst downturn since the Great Depression.
- So I am right.
We should be freaking out.
- Hold on there, Henny Penny.
The sky is not necessarily falling.
There's a lot that's different,
but to be fair,
getting out an umbrella might not be the worst idea.
(upbeat music)
- It's 1965, London, England.
The right honorable gentleman
Iain Norman Macleod is giving a speech
to the House of Commons.
In it, he would introduce
what would become famous economic portmanteau.
"We now have the worst of both worlds,
"not just inflation on the one side
"or stagnation on the other, but both of them together.
"We have a sort of stagflation situation,
"and history in modern terms is indeed being made."
- Stagflation as it came to be known
is when an economy experiences a nasty blend of two things:
inflation, the overall raising of prices
and economic stagnation
usually indicated by high unemployment rate
and decreased economic growth.
Now, at the time, this combo was considered to be
an economic Yeti.
Prevailing economic theory at the time
was dominated by the work of John Maynard Keynes.
After watching the devastation
caused by the Great Depression, he argued
that governments needed to get more involved
during economic downturns
in order to effectively cushion the blow for its citizens.
This would in turn helped stimulate the economy
back to health.
- Keynesians generally saw inflation
as a result of economic growth
and believed it to be directly correlated
to lower unemployment.
There's even a fancy graph to show this
called the Phillips Curve, a fabulous name
if I may say so myself.
However, the events of the mid 70s
would seemingly break this somewhat reassuring pattern.
Many are worried that economic indicators
in this post-COVID shocked world are neatly aligned
for a similar meltdown that we saw in the early 80s,
a time before most of the people watching this video
were even born.
- It's true that there are a good amount of similarities.
In October of 1973, war broke out between Israel
and a group of Arab countries.
The US and the Soviet Union
tried to bolster their respective allies,
which led to a rather terrifying buildup of tensions
between two nuclear powers.
Sound familiar?
In response to the US's support of the Israelis,
the Organization of Arab Petroleum Exporting Countries
proclaimed an oil embargo.
Within three months, the price of oil nearly quadrupled.
- However, COVID and the resulting energy hikes
hit a really strong and growing economy.
This wasn't the case in the 70s.
The oil crisis poured salt on an already bleeding wound
of a bear market.
In 1971, President Richard Nixon clumsily broke away
from the Bretton Woods Agreement,
an international monetary system put in place
in the summer of 1944, and the dollar tanked.
The toxic mix of events would cause the market
to lose around 48% of its value.
It would take another 21 months to recover.
This became known as the Nixon Shock.
- Today, the war in Ukraine is creating a similar effect
of nudging elevated post-COVID energy prices even higher,
with European nations really bearing the brunt of the hit.
These energy costs shocks are also coming on the heels
of historically low interest rates and rising debt loads.
The same was true in the 70s.
However, it's important to point out
that the magnitude of the price shocks, at least as of now
have not been nearly as drastic.
Things did improve following the crash of 1973
as they did post 2020, but not for that long.
- The Iranian revolution kick started another oil crisis
in 1979, more than doubling the price in one year.
Unemployment was also on the rise,
and inflation was hovering around 7%.
By this point, people were tired,
and the economic ground was ripe for a new approach.
Enter Paul Volcker as the Chairman of the Fed.
Volcker was pretty convinced the issue of inflation
had been caused by the government pumping money
into the system.
By raising rates and making money more expensive to borrow,
he hoped demand would fall and ease pressure on supply,
hopefully resulting in stabilization
and eventually reduction of prices.
So down came the interest rate hammer.
By 1981, the average rate on a 30-year mortgage
was an eye watering 18.45%.
Yikes!
No wonder I couldn't get sympathy from my dad.
- In some ways it did the trick.
Inflation plummeted by the end of 1982,
but that victory came at a huge cost.
Unemployment at the time hit an overall peak of 10.8%,
but 90% of the unemployed
were in blue collar goods production
like manufacturing and construction.
This left a lasting impact on large swaths of the country,
now known as the Rust Belt
that heavily relied on these industries.
Entire communities were routed,
and many have never recovered.
There's still a lot of debate as to whether the cure
was worse than the disease.
- Now it seems the Fed has decided to take
a somewhat similar approach and is raising rates.
Their hope is that they can effectively walk
an economic tightrope,
raising rates while keeping unemployment in check.
Thankfully, inflation has started to drift downward
since its peak of around 9% this past summer.
And while that sounds good,
it's not all rainbows and unicorns.
Think about what this represents in real life terms.
Many people who had dreams
of finally taking their hard-earned savings to buy a home
or start a business or grow their family
are deciding that the cost just isn't worth it.
Individuals and communities feel this
in a way that can't be captured in some economic chart.
- So is a terrible recession on the way or not?
No one really knows.
It is true that many of the ingredients
going into this economic recipe look the same,
but the oven they're getting cooked in is very different.
In general, our global economy is far more flexible
than it was back then.
Most central banks have mandates for things
like price stability and inflationary targets
and pay super close attention to this stuff.
Even though COVID was a shock,
the inflation that came after really wasn't.
Unlike in the 70s,
we actually had historic precedent for this,
and most governments were somewhat prepared.
It also helps that unemployment is currently really low.
In fact, as of filming,
it's only 0.2% higher than it was in February of 2020.
- However, we are in the midst of a big economic transition.
COVID made the economy sick, so we pumped it with meds
that caused other problems that we're now dealing with
as we globally continue to heal.
- The best thing you can do to prepare for times like this
is to make sure you've got a proper emergency fund
and that your investments are diversified.
There's a reason that professionals like us
sound like a broken record about this during the good times.
The deeper and wider your financial roots,
the less likely you are to fall
when the wind inevitably changes direction.
- [Both] And that's our two cents
- Thanks to our patrons
for keeping "Two Cents" financially healthy.
Click the link in the description
to become a Two Cents patron.
(upbeat music)
Wanna learn more about pandemic inflation?
Check out our episode "Why are prices going up?"