Inflation continues to hover above an annual rate of 8%, with prices for gasoline, natural gas, food and used vehicles rising the most. The last time inflation was this high, Ronald Reagan was only a year into his first term, and the headline interest rate was around 13%, compared to 1% today.
Forty years ago, the U.S. was experiencing some of the highest inflation in the country’s history after a decade of global oil supply shocks, easy monetary policy and expanding government borrowing. The convertibility of the dollar into gold had recently been suspended, and this had the immediate effect of devaluing the greenback.
There are key differences between then and now—unemployment was alarmingly high in the 1970s and early 80s, for instance—but there are also a few obvious parallels. Today we’re facing our own global supply chain disruptions, for everything from food to energy, largely as a result of the war in Eastern Europe and ongoing Covid lockdowns. A shortage of semiconductor chips has slowed the manufacture of new automobiles, appliances, data centers and more.
Even though the Federal Reserve has begun raising rates in a new tightening cycle, monetary policy remains extremely accommodative on a historical basis. Combined with trillions of dollars in pandemic-related stimulus, this has served as rocket fuel for corporate borrowing and household debt, both of which stand at all-time highs. For the first time ever, the federal government now owes over $30 trillion, or nearly 130% of the U.S. economy.
The truth is, officials are much more comfortable with large deficits today than they were in the 1970s, and that’s all thanks to modern monetary theory, or MMT. Advocates of MMT believe that deficit spending is perfectly fine since the government can just issue more of its own currency to pay for it all. And thus the cycle continues.
Gold Was The Number One Asset Of The 1970s
So what can investors do?
Again, history is a valuable guide. The best asset to own in the 1970s was gold, which went from $35 an ounce at the beginning of the decade to as high as $850 by 1980. Investors sought a hard asset that could go toe-to-toe with inflation and hold its value over time, and the yellow metal fit the bill. Unlike fiat currency, which policymakers can create more of out of thin air, gold requires incredible amounts of time, energy, and money to produce. This helps keep its supply in check.
But does the thesis still hold up?
Well, consider this: So far this century, through the end of April 2022, gold has outperformed the S&P 500 by …….