In 1963, the now-defunct magazine The Statist reported an (unnamed) American senator as saying: “I am against inflation. I am against deflation. I am for ’flation.” At the time, the UK economy was experiencing just that. Unemployment was low (2%). Wages were picking up, but not yet by much. Productivity was rising. State spending was just about under control. There was some spare capacity (about 50% of firms said they could produce more). Exports were rising (with the greatest rise, by the way, being in sales to the European common market, from which the UK was still excluded). Inflation was low and steady. In all, there was no real feeling among the experts that there was any risk out there. Too many people, said The Statist, were “too jumpy and too frightened of good news”. They needed to get a grip.
If that doesn’t sound familiar, it should: in our cover story, John Stepek explains the close parallels between then and now. The happy ’flation of the early 1960s soon gave way to one of the things our US senator was so against – inflation. By 1967, The Statist was worrying about rising wages and angry workers; inflation was on the up, and the economic miseries of the 1970s were just around the corner. Could the same be set to happen again?
Some of it almost definitely is. ’Flation is gone. Inflation is back (low for now, but definitely back) and quantitative easing and negative interest rates are slowly disappearing from central-bank playbooks. That suggests the great bond bull market of the past 35 years really is over (when interest rates rise, bond prices fall), which will have some expected and all sorts of unexpected effects on the financial system and real economy. None of this necessarily takes us back to the 1970s – what happens next depends on all sorts of variables. Will rates rise too fast? Will government spending soar? Will political pressures mean that wages outrun productivity? Will rising bond yields crash the stockmarket, and the housing market? Will rising rates be inflationary in themselves (by forcing weak companies into bankruptcy, thus cutting capacity in the economy)?
A good few interesting things have happened in the financial world in my career so far. I saw the great Japanese bear market first hand. I was in Tokyo watching dealing-room screens when the Asian crisis kicked off in 1997; we launched MoneyWeek into the dotcom crash; and we have all had ringside seats throughout the great financial crisis. However, the excitements clearly aren’t over yet: the shift from ’flation to inflation and the consequent turn in the bond bull could easily be the most interesting thing yet. If you only have time to read one thing carefully in the magazine this week, make it John’s story. One way or another this will affect your investments. You might as well be ready.