In the disco-loving days of the 1970s, John Travolta was dazzling Americans in white bell-bottoms while dancing to the Bee-Gees in the hit movie Saturday Night Fever.
Joe Biden was campaigning alongside longtime segregationist Senator Jesse Helms to end the busing of black children into white school districts. (Kamala Harris, his now VP candidate, reminded America of that in the early Democratic debates.)
And, the Federal Reserve was desperately trying to fight a new kind of economic turmoil, the likes of which they never thought possible. Stagflation. It’s the economic equivalent of a poison pill: High inflation and low growth.
An Economic Poison Pill
Stagflation is what you could call one of the worst and most challenging economic scenarios; one that causes Central Bankers to wake up in cold sweats in the middle of the night—and one, that could quite possibly rear its unpredictable, ugly head again.
If Joe Biden and Kamala Harris wind up in the White House, if the Democrats gain control of the Senate and maintain the House, then we will have real economic problems not unlike those that we saw in the 70s or even, the 30s (though I’ll save that decade for another column on another day.)
Already, there are indications of stagflation’s creep…growth is low, yet commodity prices are high. Sound familiar?
Reliving the 1970s
As commodity prices soar and economic growth slows, it’s not inconceivable our economy could experience the nightmare scenario of high inflation and low growth of Nixon and Carter administrations. In the 70s, it was the supply shock coming from the Middle East that caused oil prices to spike so dramatically.
The normal economic rationale for that would be; oil prices are rising because there’s plenty of demand. EXCEPT that the oil cartels were exactly that…cartels. As such, they didn’t play by normal supply-demand, market rules. AND, as such, they continued driving oil prices higher, as we all paid the price.
Shortages, long lines, and high prices. It was so bad that as a kid in 1979, I remember my parents making a big deal out of switching to a Diesel engine car in hopes of avoiding those long gas lines. It sort of worked. (That was, so long as we could find a gas station that carried Diesel!)
Long Live the Reagan Economy, Laffer’s Supply-Side Economics and Blondie
It wasn’t until the supply-siders of the Reagan era, including my good friend Art Laffer were able to influence economic policy to help get the government out of the way that we saw the reversal of the stagflation in America. The Fed, too, had to get tough and interest rates skyrocketed.
But, this isn’t the 80s. If Donald Trump doesn’t win, we will no longer have Laeffer’s quasi-successor, my friend and former co-host Larry Kudlow in place as the head of the National Economic Council. Like Laffer, Kudlow is an alum of the Reagan administration and, also like Laffer, Larry a big proponent of supply-side economics.
And, now…are you ready for some extra bad news?
Bell-bottoms Could Make a Comeback
Commodity prices, like the 1970s, are currently spiking. Silver futures jumped 26% in the third quarter. Meanwhile, copper is up about 8% for the year having recovered roughly 40% in the past six months following an early-year sell-off tied to the decline in Chinese economic growth after China’s economy shut down during coronavirus. And while we don’t have the middle east as an economic threat – we do have China. China, which doesn’t play by the same rules as the rest of the world.
Like the cartels of the 1970s, China packs some serious economic punch in terms of its ability to buy up the commodities markets. And the more China buys, the higher the commodity prices go. China accounts for roughly half of global copper demand, making its manufacturing sector a primary driver of prices. Copper is a key component of everything from electric vehicles to smartphones. All while we here at home in the U.S. are still coping with an on-again-off-again economy.
If commodities keep moving higher, and the Democrats take over, stagflation could hit us hard…just as we’re attempting to stabilize our economy. Given the left’s bias towards socialism and the current Fed policy bias welcoming inflation, it is clear we are at risk for heading back to bell-bottoms and stagflation.
NOT a good look.