The 1970's were complex because there were multiple factors all conspiring to promote high inflation. It wasn't a black and white situation like proponents would have you believe that inflation all is (Friedman's outdated NeoState monetary policy dreck).jafs wrote: I wonder if you can help me understand something. It seems that when stocks and bonds (especially ltg bonds) both do badly the culprit is "stagflation", which I take to mean a combination of a poor economy with high inflation.
What I don't get is how that can persist for very long - inflation is generally understood as a rise in the costs of goods and services (pace to our Austrian brethren). So if the economy isn't doing well, people can't afford higher prices and I'd expect one of two things (or both) to happen. People will not buy stuff at those prices, which should bring them down (supply and demand) and/or as that happens, businesses will struggle, lay people off, etc. and we'll move into a recessionary trend.
Then ltg bonds should do well, right?
So either inflation will drop or the economy will spiral downwards - what am I missing?
Inflation can manifest from four possible causes, but in the 1970's wages were linked to inflation in employment contracts, so it was a demand push source of inflation each and every year. Throw in supply shock inflation from OPEC which was in response to the 1973 Israeli War and chronic devaluation of the USD under fixed exchange rates from Guns N' Butter spending (Korea, Vietnam, War on [Black] Poverty, Medicare, Great Society), stupid price controls by Republicans, overregulation, nationalization and socialism in the private economy that promoted secular growth stagnation (especially in the UK), and it was just a huge cornucopia of a clusterfuck of what NOT to do.
You have to understand inflation is as much a psychological phenomenom as it is any actual supply exceeding demand or demand exceeding supply. It was "baked into the cake" under the fixed exchange system pre-1971, so it had to have its pressure relief valve, kicked off when the fixed exchange rate system collapsed. Systematically, inflation can take on a self-fulfilling prophecy which did indeed occur in the late closing years of the 1970's when the mainstream Boobuses became utterly convinced the USD was going to go completely worthless. If people are convinced that inflation won't be brought under control someway, somehow, somewhere and they see the snowballing effect of capital flows into tax shelters and real assets, the trend will feed upon itself endlessly up until that point there is a "straw the breaks the back". It's an envious bubble dynamic like any other.
Stocks and bonds can also do badly under "Tight Money" which is not the same as "stagflation". All it takes is a lack of confidence in any asset other than cash. If the PP had cash that could be leveraged up to match the risk of the other assets, it would be a lot more visible when capital flows choose it.