• 1 hour LNG Glut To Continue Into 2020s, IEA Says
  • 3 hours Oil Nears $52 With Record OPEC Deal Compliance
  • 6 hours Saudi Aramco CEO Affirms IPO On Track For H2 2018
  • 8 hours Canadia Ltd. Returns To Sudan For First Time Since Oil Price Crash
  • 10 hours Syrian Rebel Group Takes Over Oil Field From IS
  • 3 days PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 3 days Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 3 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 3 days Schlumberger Warns Of Moderating Investment In North America
  • 3 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 3 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 3 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 3 days New Video Game Targets Oil Infrastructure
  • 3 days Shell Restarts Bonny Light Exports
  • 3 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 4 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 4 days British Utility Companies Brace For Major Reforms
  • 4 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 4 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 4 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 4 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 4 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 4 days Rosneft Signs $400M Deal With Kurdistan
  • 4 days Kinder Morgan Warns About Trans Mountain Delays
  • 5 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 5 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 5 days Russia, Saudis Team Up To Boost Fracking Tech
  • 5 days Conflicting News Spurs Doubt On Aramco IPO
  • 5 days Exxon Starts Production At New Refinery In Texas
  • 5 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 6 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 6 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 6 days China To Take 5% Of Rosneft’s Output In New Deal
  • 6 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 6 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 6 days VW Fails To Secure Critical Commodity For EVs
  • 6 days Enbridge Pipeline Expansion Finally Approved
  • 6 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 6 days OPEC Oil Deal Compliance Falls To 86%
  • 7 days U.S. Oil Production To Increase in November As Rig Count Falls

Breaking News:

LNG Glut To Continue Into 2020s, IEA Says

Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

More Info

Are We Heading for a Decade of 1970s Style Stagflation?

Are We Heading for a Decade of 1970s Style Stagflation?

Four key factors in the 1970s were very different from present conditions, and that argues against 1970s-style stagflation as a model for 2010-2020.

Sometimes history rhymes--but only for the first line. On the surface, there are reasons to anticipate a 1970s-style stagflation in the decade ahead: a stagnating economy beset by rising inflation.

Four fundamental factors that profoundly influenced the economy in the 1970-1980 period are not present today. As a result, we must be careful not to expect history to rhyme stanza after stanza.

1. Demographics: the Baby Boom came of age and started households en masse. Baby Boomers bought houses, cars, furniture, etc. for their new households, and started businesses which created even more demand.

In other words, the demographic macro-environment was one of strongly rising demand for goods, services and credit. Housing leaped not just in response to inflation but in response to strong organic demand from 78 million Baby Boomers.

The demographic trend is now reversed; the Boomers are saving money for retirement and shedding assets to fund their healthcare and the costs of no longer being productive (retired). Governments are having to channel huge sums from spending into their pension funds for retiring Boomers.

(Disclosure: I am 56 and thus a Boomer, and I do not expect to draw a dime of Social Security or Medicare.)

2. Imports were limited, giving domestic suppliers pricing power (the ability to pass on higher costs to consumers). It is rarely noted that the U.S. emerged from World War II with little competition as many of its global manufacturing competitors lay in ruins.

While Japan and Germany began exporting autos to the U.S. in the 60s, it wasn't until later in the 70s that Japanese goods offered serious pricing competition to domestic producers (anyone remember the Datsun B210?). This allowed domestic producers to pass rising input and labor costs to consumers, feeding the inflationary cycle.

Now many of the manufactured goods sold in the U.S. are made elsewhere, and the competitive environment is fierce; the only firms with pricing power are those with technologically "hot" goods like iPhones.

3. The quadrupling of oil prices rippled through the economy, raising costs for everything. Energy is a cost input to virtually every good and service, and the price jump of 1973 spread higher costs throughout the economy. As this raised prices, it was inflationary, and as it was in effect a new tax on the economy, it lowered demand and spending, causing stagnation.

In response to that 1970s increase in oil costs, the U.S. economy became more efficient in its use of petroleum, i.e. the amount of oil consumed to generate every dollar of GDP has fallen.

The big unknown in the decade ahead is the timing of Peak Oil, that is, when global supply falls irrevocably below baseline demand. As I have stated here many times, I believe we are in the "head-fake" stage when global Depression (oops, "Great Recession") is cutting demand so much that there is still enough surplus production to keep prices relatively low. As the output from supergiant fields falls, then all this surplus production will at best be replacing supply lost to depletion.

When Peak Oil kicks in, then $300/barrel will seem like a "fair price" and the shockwave to the U.S. economy will outstrip the 70s oil price shock by an order of magnitude because the low-hanging fruit of efficiencies have been picked.

But nobody knows when supply will fall irrevocably below demand, as geopolitics and physical supply are both causal factors.

4. Debt loads were low. The forced savings of the domestic workforce and Armed Forces during the War created a stupendous reserve of capital to fund new production capacity in the 1950s and 60s. Consumer debt was modest by today's standards, as was the Federal deficit. The nation reeled in shock when the Federal deficit hit a staggering $46 billion in the mid-70s --roughly $175 billion in today's dollars--a mere 11.6% of this year's $1.5 trillion Federal deficit.

Total Credit Market Debt

So the debt load of the nation is much higher than in the 1970s, both private and public debt. More of the national income must be diverted to service that debt, depressing demand. New private borrowing is constrained by stagnant incomes and declining asset values. Higher taxes levied to fund unprecedented Federal deficit spending also reduces private demand and borrowing.

In other words, we won't be able to "borrow our way" out of asset deflation and gin up a "wealth effect" as occurred in the 1980s.

With three of the four conditions being reversed from the 1970s and the cost of oil in the decade ahead a big unknown, this suggests that the stagflation of that decade is not a good predictive model for the coming decade.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News