In 1979, when I was finishing high school and starting college, I read Howard Ruff’s How to Prosper During the Coming Bad Years. I was aware of inflation, was starting to understand what it meant, and I remember a few perilous months in early 1980 when the price of gold shot up, and it seemed at one point that the economy might go off the rails.
Now we face the same problems as back in 1979, only worse. Howard Ruff has updated How to Prosper. But we got through the last thirty years in mostly decent shape. There was no hyperinflationary collapse.
Why is this time different?
More specifically, the bad things that we feared at the end of the 1970s never materialized. Why should I worry this time?
- In 1979, we were still a productive country. The Chinese were not in the business of manufacturing anything and everything for export. There were still many businesses that were run in the interest of providing whatever goods or services they purported to provide, rather than making this quarter’s numbers.
- In 1980, Ronald Reagan was elected President. Much has been written about how he turned the country around and made us prosperous again. But he didn’t balance the budget, and indeed, first brought us into the era of huge deficits. Reagan was every bit as inflationary as his predecessors, if not more. But there’s one difference:
- Under previous Presidents, inflationary spending went everywhere in the economy, and consumer prices went up along with everything else. When the price of bread and gasoline go up, people get angry.
- Under Reagan and subsequent Presidents, inflationary spending got directed into the investment markets. Consumer prices still went up, but nowhere near as quickly as before. But the stock market and the real estate market shot up. When the prices of houses and stocks go up, people are happy, as they think they’re getting richer.
In 1979, we had margin for error. That margin has been relentlessly squeezed out over the last 30 years.
Yes, it’s different this time.