![]() Below-target inflation meant that central banks kept interest rates low, creating ideal conditions for investors. Higher unemployment, better technology and cheap imports kept consumer prices and wage inflation low, and helped to boost corporate earnings. The Goldilocks decade of the 2010sĭespite trillions of dollars of central bank stimulus, the “jobless recovery” after the global financial crisis was slow and painful, as enormous debt burdens had accumulated. The Fed came to the rescue again with several years of very low-interest rates, which then led to the more devastating credit and housing bubbles of the 2000s. Economic over-confidence led to market over-valuation, and ultimately the stock bubble of the late 1990s. In hindsight, we know now that too much stability eventually causes instability. Fed chairman at the time, Alan Greenspan, became known as “the Maestro”, and apart from a mild Gulf War recession in 1991, the US enjoyed almost two decades of steady growth, low inflation and extraordinarily strong market returns. It wasn’t all smooth sailing, but whenever inflation looked like it might return, the Fed stepped in with pre-emptive rate hikes to cool things down, as in 19, and when there were emergencies, they provided rescue rate cuts, as in 19. For economists, this was the “Great Moderation” and for investors, it ushered in the Wall Street boom years. As the economy stabilised and interest rates came down again, the cost of doing business fell and investing became less risky. They established the reputations of central banks, especially the US Federal Reserve, as credible inflation fighters. 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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