Did we buy a golden ticket for the 1970s?



It turns out that time travel is possible, after all. All you need is reckless monetary policy and, boom, you’re back in the 1970s. Gold seems to love such trips!

Have you ever dreamed of time travel? Now it is quite possible, thanks to the Federal Reserve. Thanks to its accommodative monetary policy, we are going back to the 1970s. Just like fifty years ago, the US central bank is allowing inflation to rise, claiming that the employment target is much more important and that the Philips curve s. is flattened. In the 1970s they thought the same, but it turned out that after all, you can overheat the economy! And just like Arthur Burns half a century ago, Jerome Powell believes that inflation is only caused by a few specific categories, and that it will prove to be transitory.

I have been pointing out these troubling parallels for months. Now, as Harvard University professor Kenneth Rogoff noted, with the United States’ humiliating exit from Afghanistan and the fall of Kabul, the similarities between the 1970s and 2020s are growing. Other dangerous similarities are the relatively rapid growth of the money supply (see graph below), budget deficits, and the presence of supply-side shocks (but instead of oil shocks, we suffer from a shock of semiconductors and disruptions in other supply chains).

Rogoff also points out some important differences, namely the willingness of the independent central bank to raise the federal funds rate if inflation gets out of hand, and much lower interest rates that give the Treasury leeway for its operations. lax spending.

There is some truth to Rogoff’s assertions. Central bank independence is much more firmly established, and Powell is a far cry from Burns who was subjugated to President Nixon. However, please note that both private and public debts are much higher than fifty years ago. This huge pile of debt makes interest rate hikes much more painful politically. The high indebtedness is already one reason why the Fed is maintaining an accommodative stance and will normalize its monetary policy at a very gradual pace.

Remember the Fed’s recent attempts to roll back quantitative easing and bring interest rates back to more normal levels? The economic slowdown and the repo crisis forced the Fed to cut the fed funds rate again and revert to asset buying. It was in 2019, long before the start of the pandemic. So never underestimate the power of the debt trap!

What does all this mean for gold? Well, if we really get into the 1970s, gold could be one of the biggest winners. The yellow metal then experienced a bull market, so a similar positive scenario could reoccur now.

Yet fifty years ago the US economy entered stagflation – a period of high inflation and economic stagnation. The current situation is clearly not so bad: inflation is lower than in the 1970s, while GDP growth is positive. However, the recent slowdown in economic growth, despite massive monetary and fiscal stimulus, suggests that mini-stagflation may be underway. The spread of the Delta variant of the coronavirus is hampering economic growth, and monetary and fiscal policies remain flexible, contributing to upward pressure on prices.

If the Fed’s story on transient inflation is wrong, it will need to tighten policy more decisively than expected. A sharp tightening cycle could be negative for gold prices as the yellow metal prefers an environment of low bond yields. However, aggressive measures to fight inflation could also cause the prices of risky assets to fall, or even a financial crisis. So, if the Fed stays behind the curve for a long time, gold should ultimately benefit – either from accelerating inflation or from the Fed’s sharp tightening triggering a sovereign debt crisis or an economic crisis (for As a reminder, Paul Volcker contained inflation, but the US economy went into recession).



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