Inflation Nation or the Roaring 20’s Redux?

In the past century, when compared from numerous perspectives, there are probably no two different decades than the 1920s and the 1970s. 

The Roaring 20s brought us great prosperity while the 70s were measured by something we called the “Misery Index”. On the other hand, the 1920s led us to the deepest stock market sell-off of all-time while the 1970s were followed by the greatest stock bull market of all-time from 1982-2000. 

As we sit halfway through 2021, the official first year of the 2020s, we try to address the question in our title above. Will the decade of the 2020s usher in the redux of the Foxtrot Dance popularized in the 1920s or the dance known as the Hustle which exemplified the 1970s? 

We attempt to make the case that we are not embarking on an economy defined by stagflation or recession but rather much like the events that propelled the economic growth of the 1920s, we are embarking upon a new era of productivity through technological advancements led by 5G Connectivity, FinTech, Cloud Data Storage, EV and Autonomous Vehicles and Robotics and Artificial Intelligence. 

These technological advancements in our estimation will keep inflation subdued and allow for workers to produce more output per hour worked (definition of productivity) while garnering high wages along the way, again without producing inflationary pressures.

So why are the 1920s known as the Roaring 20s? In summary, U.S. prosperity soared as the manufacturing of consumer goods increased as durable good items like washing machines, refrigerators and vacuum cleaners became everyday household items, which led to vigorous growth in the US. Furthermore, this rapid rise in prosperity which ushered us into the modern era, was ultimately led by the proliferation of electricity and simply revolutionized our life in the way we socialized, entertained ourselves, communicated and moved from point a to point b.

While the 1920s were defined by unfettered prosperity, the 1970s were measured by something called the “Misery Index”, which aggregated the unemployment rate and the inflation rate. Stagflation got its name from the recession that occurred between 1973-1975 when the economy produced five consecutive quarters of negative GDP. The unemployment rate peaked at 9% in May 1975 and inflation tripled from 3.6% in 1973 to 12% in 1975.

Although always a prudent exercise to look to the past to provide a gauge for the future, the big questions are: 

  1. “Is today’s US Government embarking on Stagflation characterized by slow economic growth and relatively high unemployment.
  2. “Is the US Government in essence printing currency while at the same time restricting supply?” 

In short order, the answer is yes and no.

Yes, both monetary and fiscal policy are accommodative. To that there is no doubt. 

However, when it comes to the second question, the answer is profoundly no. The Wage and Price Controls of the 1970s have been laid on the ash heap of destruction and hopefully will never be seen again. 

We finish our case with the following points as to why a persistent 1970s Inflation Nation is highly unlikely:

  • Energy landscape has dramatically changed with competition from alternative forms and cartels limiting supply via embargo. This in part spurred inflation in the 1970s.
  • Gold Standard has been off for 50 years with the initial shock a half century behind us.
  • Aging demographics in the Developed World with many central banks battling deflationary pressures in Japan, UK, Euroland and Russia are concerned about declining prices, not rising.
  • Wage-Price Controls would not even be considered today as a legitimate policy response.

In summary, innovation supersedes fear every time. With the forthcoming wave of Next Generation Technology on the horizon, rather than putting on our disco shoes, doing the Hustle and lamenting a redux of the 1970s, we should default to learning the Foxtrot or the Charleston and celebrate like the Roaring 2020.

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