Uncomfortable echoes of the 1970s
We are going back to the 1970s — a relentlessly awful decade. This is becoming a consensus view in the investment community — and one that will only gain steam now there may be a crisis election à la 1974 — the one which gave us a hung parliament.
But look a little closer at the seventies and you will see nothing was relentless — or, for that matter, consistent. The US and UK economies were neither mired in recession nor caught in a nonstop boom, but chopped and changed between the two.
It was almost always too hot or too cold. Never just right. You can see that in UK GDP (growth ranged from well over 6 per cent to -2.5 per cent), in inflation (6 per cent to 25 per cent) and of course in house prices — booming into 1973, falling in real terms between 1975 to 1977 and booming again into 1978.
You can also see this volatility — and perhaps its cause — in the confused monetary policy in both countries. In the US, Arthur Burns, chair of the Federal Reserve from 1970 to 1978, has come in for a lot of stick for keeping rates too low to prevent inflation.
But during his tenure interest rates were generally slightly positive in real terms, that is higher than inflation. You don’t see much of that these days. And in the early 1970s he was at least clear that to “let there be no mistaking our determination on this” when it came to inflation.
But there was mistaking. By 1974 his determination was wobbling, and as unemployment began to soar he backed off. This was something, Argonaut fund manager Barry Norris points out, that he later blamed on being “caught up in the philosophical and political currents that were transforming American life and culture” — that is on having priorities beyond inflation.
The stop-go cycles came to an end in the UK with Margaret Thatcher’s government raising UK interest rates to 17 per cent and in the US with Paul Volcker taking interest rates to near 20 per cent.
But it is worth noting that even Volcker’s first year was not great. Rates went up to 13 per cent and then to 20 per cent — but soon they were back down to 9.5 per cent even as inflation headed back to 14 per cent. Even the great slayer of inflation needed a little practice.
Still, one false start on and he had the hang of it, so much so that by late 1981, car dealers were sending him coffins stuffed with the keys of unsold vehicles and he required his own security guard.
The point is that the 1970s were not easy to manage. Supply crunches meant it didn’t take much for rising demand to cause inflation but fall-offs in demand quickly led to recession — which led to the too-fast loosening of monetary policy and then more inflation.
Central banks could have ended the cycle earlier by forcing severe recession. But, worried about unemployment and inequality, they didn’t want to. Sound familiar? It should. We are very probably entering a similar age of volatility — in central banking thinking, inflation, interest rates and markets.
And so to your holiday reading. Your first port of call must be The Price of Time: the Real Story of Interest, by Edward Chancellor. This is not short, which goes against my usual policy — temporarily abandoned during lockdown — of suggesting the lightest books possible.
I’m abandoning this approach for one more year — and hopefully one more year only — for the simple reason that on current airport performance there is an excellent chance that you will be waiting a long time to go nowhere this summer.
You’ll thank me for your 400-page hardback when WHSmith has closed and you are on your 14th hour of waiting for BA to give up and cancel your flight. The benefits of its size aside, this is the best and most entertaining explanation there is of the history of the only number that really matters in finance — and by extension most other things. And of how much you have to pay to borrow money — or as 18th century economist Ferdinando Galiani described it, the “price of anxiety”.
The answer in much of the 1970s — and in pretty much every moment of the last decade has been “not enough.” Which is why the chief executive of Sainsbury’s was caught singing — not quite under his breath — “We’re in the money/Come on my honey/Let’s lend it, spend it, send it rolling along” as he prepared to borrow a vast pile of money for almost nothing to buy a rival in 2018. It’s why cryptocurrencies exist, why growth stocks went to the moon and back and, well, why we are where we are.
“We are not thinking about raising rates. We are not even thinking about thinking about raising rates,” Chancellor quotes Jay Powell as saying in the summer of 2020. If only he had.
On the subject of how we got here, if you have not already, you should read Alasdair Nairn’s The End of the Everything Bubble. You might think it is a bit late — and, yes, you should have read it last year given Nairn’s rather good record of analysing these things — but it is still worth it for a full understanding of quite how the markets got so carried away — and a hint or two as to what you might do next. “Create a liquidity reserve,” he says, for within the volatility there will be opportunities.
Back to stop and go — with global stocks sticking in bear market territory and recession ahead, it is going to be hard for central banks not to be a bit like Burns and not to stop raising rates a bit too early and start the whole thing all over again.
What might it feel like? Some readers will remember the 1970s. Those that don’t should turn to two lovely books on the matter, Crisis? What Crisis? Britain in the 1970s by Alwyn W. Turner and State of Emergency: The Way We Were 1970- 1974 by Dominic Sandbrook.
The latter is worth more than a skim (this is rare in non-fiction books) for its detail of reminders about how almost nothing is new: turn to chapter five for a reminder of the way in which the TV programme The Survivors reflected the “eco catastrophism” of the time with the story of how the escape of a deadly virus from a Chinese lab caused a global pandemic and precipitated total economic collapse.
Then to chapter 16 for the story of the crisis election of 1974 and the hung parliament that resulted — under the circumstances maybe read this chapter first.
Next up, a small back-up volume for your bag. A Scottish referendum on breaking up the UK is rather less likely than a crisis election for all of the UK — and even if a way were found for the SNP to overcome the wishes of Scotland’s majority and hold one, a win for the nationalists is very unlikely indeed.
However, either way, the nasty rows on the matter are coming back as part of the general round of political volatility you can expect to stick with us for some time, so you might as well have some sense of what really matters.
With that in mind, Tom Miers’ The Bargain is a good read. It lays out the economic evidence showing that being in the UK is materially good for Scotland — very good — and looks at the political and cultural reasons why we belong together.
The book calls for a change in approach. To pretend, says Miers, that “independence is cost free, as the current nationalist leadership does, is simply dishonest”. A little more honesty all round might not hurt.
Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal. firstname.lastname@example.org