Opinions of decades change over time. I remember back in the 80’s the 1970’s were regarded as, well, a bit shit really. People wore flares, brown suits and spent most of the time on strike or huddled around a candle burning five pound notes to keep warm. The 70’s reputation was one of strife and bad clothes.

Punk, disco, glam, these were antiquated things to be laughed at. I remember Abba being so out of fashion in the 80’s it was an actual crime to own one of their records. Hard to believe that now. But I continued playing them. Yes, I was the person who made Mama Mia possible. Thank you.

The 80’s were shiny and the 70’s were dull. The 80’s were a time of renewal, the 70’s a time of decline. And so went popular opinion.

But as time passes, an inevitable reassessment takes place; distance really does add depth. The 70’s were also the decade when the spirit of the 60’s was democratised into the population as a whole, not just the illuminati. 1976 was a blisteringly hot summer. There are some great films (Dirty Harry, Star Wars, Grease) and some classic music. And the styles themselves, once so derided, seem more in tune with now than the shoulder pads and mullets of the 80’s.

Which is all a long way around to introduce the topic of inflation. Because, one thing that the 70’s really own, really can claim as their ‘thing’, is inflation. And with our government(s) creating money like Robert Mugabe spinning the printing presses of the Weimar Republic, inflation is back on the agenda.

We seem to have forgotten about inflation. Since the early 1980’s when Thatcher’s government set out to conquer it, we’ve not really experienced its effects. This may have bred some complacency - or simple ignorance - amongst our central bankers and politicians. “Inflation?” they might intoned using ill merited superiority, “That’s not going to be a problem. We’ve printed money for more than a decade with no inflation. Theres no inflation around here.”

But, like Voldemort, is it ever really dead? *

Tim flips to the serious bit

What is inflation? Inflation is the rate of price increase in goods and services over a defined period of time. So, if a pen costs £1 in Year 1 and £1.10 in Year 2, the inflation rate (for pens) is 10%. Add in everything else in an economy and you get the aggregate rate. We all know this. But what causes prices to rise?

“Too much money chasing too few goods” - Demand Pull Inflation

If you are a monetarist - Milton Friedman being the most prominent here - inflation is caused by a prior expansion of the money supply. This was a lesson that was drummed into all of us in the 80’s who studied economics (I did). Too much money causes inflation. Why is this? Well, if you you increase the supply of something, the price will fall; the falling price of money being inflation. The obvious landmark event in the 70’s was Nixon coming off the gold standard in 1971 and tearing up Bretton Woods. This de-anchored currencies allowing governments to dabble where angels had previously feared to tread.

Further to this, if there is more demand than the supply of goods, the price of those goods will tend to rise. This is evidenced in the long -form economic seminar we call Jingle All The Way where the lack of supply of the kids’ toy jacks up the price discomforting Arnie’s character.**

True, perhaps. But what about other causes? Some (Binder et al) argue that there were two types of inflation in the 70’s - underlying inflation and price shock inflation. The argument goes that the 70’s was a period of price shocks - oil, of course, but also food and the perverse affects of prices and incomes controls in the Western World. If you hold something back you not only suppress supply but create pent up demand for when those controls are released, creating a surge in inflation. Hello 1974 and, perhaps, rebonjour 2021 as lockdowns are finally lifted.

Yes, 1974 was the big year of inflation. The mother of all inflated years (though inflation peaked in the UK at 24% in 1975). So, the big question on everyone’s lips is; is QE the new OPEC? Or is QE the new decoupling from the gold standard? In other words, are we heading for a short and bracing bout of one time inflation or several years of systemic inflation?

Beyond my pay grade, I’m afraid to say. It’s interesting to note wage pressures. The 70’s were a time of powerful unions, industrial actions and wage increases (which, in turn, led to further inflation). Through Thatcher’s reforms, this seems to have gone away in the UK though the nurses’ recent 12.5% wage increase is perhaps the first salvo in the inflation battle to come. I don’t get the sense of labour shortages (yet).

However, as we all know, although inflation is a bitch to the common, working, person it’s much kinder to those with large debts. The biggest of these debtors is, of course, the government borrowing like crazy at the moment. Talk about a fox being in charge of the hen house!

But what can we do?

How can we adopt some defensive strategies? Well, here’s some I pulled out of my arse:-

Real assets tend to increase in value as a currency devalues. My numismatic hobby might just turn golden, if you get my drift.***
Other real assets, land, property tend to do well. When the currency is being flushed down the toilet, possession of tangible stuff is key.
Is this finally the time for digital currencies?
if you’re on a variable interest rate mortgage, perhaps this is the moment to consider (or increase) overpayments. Go long in fixing your mortgage payments.
Savings. Savings. WTF can we do about savings? One would assume that if inflation starts to take off the BoE will need to raise interest rates. It will be interesting to see if this finally triggers a commensurate rise in the savings rates banks offer. It’s been so long since there was a decent rate. Would any potential rise in deposit rates keep pace with inflation however?
Equities. I’ve not been able to discern much sensible information about stocks and inflation. The twin crashes of the 70’s had different outcomes for the FTSE - 1973/4 a massive crash, 1979/80 a modest increase. There is a theory that value stocks do better in periods of high inflation whereas growth stocks do not. But there’s too much noise to discern any clear pattern. As ever, playing the stock market is a matter of judgement, experience and timing. And luck. But on average, and over time, it tends to increase despite periods of inflation. ****

A parting thought. We’ve never really lived in a time when a government has deliberately crashed an economy and then used massive money printing to foot the inevitable bills. How much supply has been eroded in the last year, to soak up the QE, will soon be put to the test. Inflation is perhaps one outcome. When furlough finishes, unemployment will be another. My discredited Phillips Curve used to suggest there was an inverse relationship between these two evils. I fear we’ll get both again.

And on that sombre note, let’s play Rod and Faces, one of the better memories of the 70’s. It merits a longer entry - which I’ll get around to - but they were sloppy, they were loud, they were drunk but the Faces had swagger and were one of the best live bands ever! Ronnie’s guitar tone. Wow!

NOTES (How pretentious, I am!)

*I know, I know. Harry Potter references now. I’ve slipped. Must up the quotient of better references.

** I’m really going for it now - an Arnie reference no less!

*** Numismatics - collecting coins. UK gold sovereigns are a good - and tax free - way of wealth protection, I’m told. But there again, the guy who told me this was Gordon Brown.

**** The FTSE was 289 in 1970 and 620 in 1980. Go figure.