Today’s economic situation isn’t pretty, and it could get significantly worse, however we have tested the waters before, just not with all the underlying effects that we have today.
After an energy crisis in the late 1970s and an Iranian conflict, inflation in the U.S. soared to incredible heights for the 2nd time in the early 1980s.
Officially, inflation soared to near 15%, which is still a post-WWII record (for now). Unemployment was high back then, too. It hovered around 7-8%, even reaching a shocking 11% in 1982.
Enter Paul Volcker, the Federal Reserve Chairman from 1979-to 1987. To make a long story short, the controversial Fed official had to initiate what was considered an unconventional approach to curbing the “near hyperinflation” of that time.
Volcker charted a course involving an incredibly dramatic rate hike that intentionally sent the economy into recession. The U.S. central bank did something counterintuitive for an institution that strives to maintain the most productive economy possible: It manufactured a recession to bring prices down.
The fed funds rate began the decade at a target level of 14 percent in January 1980. When officials concluded a conference call on Dec. 5, 1980, they hiked the target range by two percentage points to 19-20 percent, its highest ever. [emphasis added]
The federal funds rate went on a policy-directed roller coaster ride between 10-18% from January 1980 to early 1983. They finally subsided below the double-digit mark after that.
During the same period, the economy dove into a deep recession. But inflation also plummeted, falling from almost 15% to a much more reasonable 2.5% in 1983.
That means sending the federal funds rate “to the moon” over four long years, triggering not just one but two recessions, actually worked. The U.S. economy got back on track and enjoyed two decades of nearly-uninterrupted growth. In other words, Paul Volcker’s actions caused short-term pain but cleared a path for a much wealthier, more productive nation.
Volcker’s anti-stagflation plan worked. That’s not debatable. That’s a fact. That’s history. It’s quite possibly the Federal Reserve’s most tremendous success.
Today, the U.S. economy is teetering on the brink of stagflation. The good news is that we know how to fix it. The bad news is, Powell is no Volcker. He seems a lot more frightened of the cure than the disease.
Let’s focus on today’s “official” method for the moment (the red line).
It’s not just today’s prices that deeply concern us; and it’s the speed at which the line is going up. Even when we look back to 1948, this is the fastest rise in prices we’ve ever seen.
There’s no amount of hand-waving or calling it “transitory” or blaming supply chains or Vladimir Putin that will cover this up. And Powell knows it. The Fed has finally, grudgingly inched interest rates just a whisker above zero (0.33%). The war on inflation has begun!
Fortunately, as we outlined previously, this isn’t uncharted territory. The Fed has been here before. They know exactly what to do. It’s a guaranteed win. So why isn’t Powell following the winning course?
A tale of two Feds
Paul Volcker took command of the Fed during a time of high inflation. He immediately started raising the Fed’s interest rates and, with a firm hand on the wheel, kept them high through two recessions. Stocks responded by plunging 50%, staying low for nearly two years, and then slowly recovering over the next six years. The 1970s were a “lost decade” for people who stayed invested in stocks. On the other hand, Volcker’s strategy cured the American economy.
By comparison, Powell became chairman of the Fed in 2018. Under Powell, the Fed’s rates never rose above 2.5% and dropped like a stone during the Covid crash. Since then, they’ve never recovered.
So why isn’t Powell raising interest rates to fight it? It’s relatively plausible that it’s because today’s Fed is nothing like Volcker’s Fed; Officials felt comfortable leaving their foot on the gas even as inflation soared to a 40-year high. Experts say U.S. central bankers usually worry about the wrong conflict. Just as officials spent the 1990s worried about inflation, the Fed probably spent the early 2020s fearing too-low inflation.
By many standards, an entirely different U.S. central bank is steering the boat, meaning officials don’t want to tame inflation with aggressive, volatile rate hikes similar to the 1980s. If Sumner is correct and “an entirely different” Fed is steering the boat, Captain Powell’s ship is not only on fire, and it’s also careening towards a gigantic iceberg.
Which way to the lifeboats?
Captain Powell doesn’t have what it takes to bring inflation under control. Even if his Fed stays on schedule with six 0.25% rate hikes annually, it will take five years to reach the level Volcker’s Fed started at. And remember, even after Volcker started, the U.S. endured two severe recessions and a decade-long bear market in stocks (the worst in living memory) before the economy was finally shipshape again.
If this were a real boat instead of a metaphor, we’d be buckling on our flotation vests and running for the lifeboats. In a financial sense, physical assets with intrinsic value like gold and silver are the economic equivalent of flotation vests and lifeboats.
Will the boat burn before it crashes onto the rocks? Who knows? If you’re already heavily diversified in in precious metals than you already have your boat docked and, filled with suppliers just in case.
Now is the time to seriously consider whether you’re prepared for the likely outcomes. here at GoldPro we’re not About just selling toy something, we want to help advise you so that not only do you have a better tomorrow, but a brighter future .
CEO at GoldPro