By Stephen Johnston
July 13, 2021
Excerpt from article:
Based on what can only be described as the massive growth of the global money supply in the last 12 months, the apparent willingness of central bankers to continue to backstop unprecedented fiscal deficits, and a large contraction in economic activity, it appears we have the raw materials for a period of high inflation, if not outright stagflation. Central bankers have been explicitly monetizing government funding shortfalls during the pandemic, something that was considered strictly taboo a few short years ago (even though it can easily be argued that this has been the indirect and intended effect of central bank activities for decades).
Therefore, we believe a good corollary for current market conditions may be the 1970s. The term that defined that era was “stagflation”. Stagflation risks have once again become a consideration for investors. Stagflation is that unfortunate set of circumstances in which economic growth slows while prices rise (in the 1970s it was caused by the OPEC oil price shock combined with loose monetary and fiscal policy in the U.S.). Examining the 1970s more closely, we see that there was a bout of stagflation during the second recession of that decade. Inflation reached levels over 12 percent in 1974 combined with 8 percent unemployment. This created an economic malaise that was difficult to escape for years. It may seem counterintuitive to have high inflation and low growth, but it can happen. It also is a very difficult environment in which to generate real returns.
Original article here