“We, the people, suffered. We still suffer from unemployment, inflation, crime and corruption.” – Taxi Driver
When I buy groceries for prepping, The Mrs. says I have stock home syndrome.
Back in the bad (economically) old days of the 1970s, a word came into existence that described the economic policy of the Carter Administration: Stagflation.
Now, if this would have been about massive helium-filled deer antlers, it would have been great. Surreal, but great. But it wasn’t. Instead, it was surreal but bad –the economy was stagnant, but the price of everything kept going up. It was like going to the dentist because of a toothache and finding out that instead of anesthetic you just got pepper spray in your eyes to take your mind off the dental surgery.
But back to surreal. The impacts of stagflation were likewise as surreal as the giraffe clock currently melting in my light socket. Here’s an example: I remember when I was first married to The Mrs., we would go and visit her parents and spend the weekend in her old bedroom. In one part of the closet was a dust-covered box filled with toys from when The Mrs. was a very young The Miss.
Is a prog rock band that plays Spanish guitar on your front lawn called Pink Flamenco?
One toy in particular stood out – it was a cheap plastic injection-molded car. It still had the grocery store price sticker on it – and it was something like $8.99.
Whoa! Back in the late 1990s, $8.99 would have bought something like a dozen similar cheap plastic injection-molded cars. Inflation had been out of control in the late 1970s when The Mrs. had been given that toy.
Everything sucked economically – crappy quality at inflated prices.
Two major factors led to that situation – Nixon pulling the United States off the gold standard was the most critical one. If we had to prove-up our spending with gold, well, we’d have to have some sort of discipline or we wouldn’t have any gold.
Discipline sounds like it’s boring, and the 1970s was made for disco parties, drugs, and infidelity, so why have discipline with our money? That’s just not cool, man. Besides, who needs rules when you have bitchin’ bell bottoms?
I guess weightlifters in the 1970s wore barbell bottoms.
The other situation is that the United States had reached a (then) peak in oil production, and was now dependent upon oil supplies from foreign nations (they were nations instead of countries back then – now, not so much). Since one group of foreigners (Arabs) didn’t like another group of foreigners (Israelis) the group that had all the oil (Arabs) decided to stop selling so much oil.
Oil is a big deal, because the price of oil is hidden almost everywhere in our economy. It’s required for planes to move bikini models, for trucks to move PEZ™, and in some places heats homes. So, increasing the price of oil was just like tossing a big tax on everything, so moms everywhere went to work to bring home the bacon, fry it up in a pan, and then wear crappy perfume and nylon pantsuits.
I think I just gave the origin story of Hamburger Helper™, but I digress.
Not everyone makes great meatloaf, but two out of three ain’t bad.
What does this mean to today’s problem? Are we in the same place?
Partially.
We’ve been partying, mostly, since the 1970s, and have gotten away with it through various shenanigans. As Ayn Rand said, “You can avoid reality, but you cannot avoid the consequences of avoiding reality.” I’ll just shrug and Ayn was talking about her polyamorous relationships, but I can’t be sure.
Regardless, 2025 is a big year for dealing with consequences. Our current national debt is something like $33 trillion. I know, it’s like Whoopi Goldberg’s butt, it’s so big it’s meaningless. But we have to refinance $9 trillion of that $33 trillion plus another $3 trillion that we’re spending that we don’t have, this year.
I mean, who is going to buy all that debt?
Don’t know. Probably not China. Or Canada. Or Mexico.
Let’s think about where that debt is now. The Federal Reserve® already owns about $5 trillion, and it’s not like they have a choice, so they’re probably in for several trillion. But the biggest holder of the national debt is . . . the government. It owes itself $7 trillion dollars.
The rocks are still worth more.
Yes, you read that right. Big chunks of that are Social Security “trust fund” that’s stuck in Al Gore’s “lock box”. I mean, seriously, what do people not understand about a lock box? But it also includes things like DOD retirement, and civil service retirement (which is over a trillion dollars). And you know we’re spending down that Social Security trust fund right now, so that just means more debt that someone else will have to buy.
It’ll be the Fed©, snapping up debt like it’s at a Black Friday sale on silicon oven-mitts on TEMU™.
A trillion here, a trillion there, and soon enough we’re talking about real money.
The way debt bonds are sold is that people bid on ‘em at an auction. What are people bidding? The interest rate. So if there’s a huge supply and lower demand, what goes up?
The interest rate.
Since we’re not paying the bills out of cash, but out of borrowed money, that means the interest paid will just go onto the debt as it’s paid, which means that even more bonds will need to be sold. That means that there will be more supply and . . . higher interest rates.
It’s a vicious circle, but one that works as long as the economy keeps growing.
But the economy likely didn’t grow last quarter, so we’re (at least right now) stagnant.
Oddly, the tariffs and deportations seem to have broken something and right now we have the lowest inflation in the last four years. I don’t think that will last. Higher interest rates will bleed into businesses, and money for expansion or even day-to-day operational expenses.
How odd that people whine and complain when you make them go live in a country they made, surrounded by people who speak the same language that they do.
These higher interest rates will also make trillions of bank assets (my mortgage, for instance) worth less. My mortgage is at an interest rate lower than I can get with a deposit a savings account. I assure you my bank is aware of that and loves it when I toss them my monthly check. This is what led to the Silicon Valley Bank® implosion – it had too many dollars tied up in low interest loans and securities, and then rates went up.
Thankfully, the Fed® made the decision that the banks can ignore the fact that their assets are worth less, or else all of them would have self-extinguished. And you wonder why gold is selling at $3,300 an ounce?
Why do I predict the high likelihood of Civil War 2.0 by 2032? Because by then, if you do the math, you’ll see that just interest on the debt will be at least half of the total tax hauled in, but I think it will be worse, because the numbers always are worse.
The solution to this won’t be a business-as-usual solution, and there will be extreme economic dislocations. There is no evidence of anyone wanting to increase our economy at the China-like rates we’d need to outrun this mess, and no appetite to cut the cost of government. At some point the consequences of ignoring reality will become so manifest that they aren’t something we can ignore.
And it runs on beetle juice.
Well, the good news is that we probably won’t see $8.99 injection molded plastic toy cars. The bad news is that they’re already selling the one in the picture above for $10.00.
I love your stuff, man. I know, lame, but I had to say it.
I really appreciate that! It keeps me going!
At some point, the Feds may have to figure out how to implement some sort of debt jubilee. I’m not sure how that would manifest in today’s economy, but the alternative is to let things spiral out of control which will be much worse.
With much of our debt held by foreign bond holders, we could just magically erase that debt. Of course that would probably lead to war and we’d never be able to borrow money again.
J-bird
bankers don’t do jubilees. they inflate
Debt is always repaid – by the borrower or the lender.
Interesting that Elon Musk is now referring to the Big Beautiful bill as a “disgusting abomination.” He clearly sees the debt catastrophe we’re facing, and is calling them out for not making serious spending cuts.
he is South African, he knows there is no place left your white folks to go
And today’s X dustup? Wow!
The bikini picture isn’t gratuitous at all. It’s the perfect metaphor for America…a big beautiful nation left high and dry despite the big beautiful pool of liquid(ity – ie, cash) created by the Fed. And yet we still all wonder why Fed is just DEF (diesel exhaust fluid) spelled backwards.
Stagflation is roughly speaking when both inflation and unemployment go up at the same time. This is weird because inflation is normally caused by increased demand in an economy (excess cash chasing fewer goods) driving up prices while unemployment and lost wages reduce demand in the economy. So unemployment usually acts as a brake on inflation. In the 1970s, you correctly note that oil and going off the gold standard acted as taxes that popped price inflation higher (spiking to over 12% annually in both 1974 and 1980, and averaging over 7% annually every year in between) even as unemployment spiked to 9% in 1975 with an average of over 6% for the entire decade. The net result was an unannounced but very real devaluation of the dollar in the 1970s.
Our current stagflation is different from 1970s stagflation. The current gimmicked BLS labor rate, calculated entirely differently today than in the 1970s, has been “only” 3%-4% over the past three years after a brief 8% spike in 2020 due to COVID. Likewise, the “official” CPI inflation rate has been under 3.5% for the past two-and-a-half years after COVID spikes in the 6.5-7.0% range in 2021 and 2022.
Hey, the official numbers look not so bad, right? Nowhere near as bad as those of the 70s! Well….
The current numbers are juiced. In the past 50 years the government has changed how things are calculated to create a web of deception. You gotta go to Shadowstats to get the truth, and the truth ain’t a pretty bikini girl lying lazily beside a pool.
https://www.shadowstats.com/alternate_data
Calculated 1980s style, the current US inflation rate is around 12-13% and the current US unemployment rate is over 25%. We are doing way worse than the 1970s.
But…but…but…the US has fracked its way to energy independence! The oil embargos of the 70s and the price jumps they caused are as obsolete as disco balls! Well, true. But now the hidden tax is not spelled O-I-L but F-E-D. The Federal Reserve first during the 2008 Great Financial Crisis and most recently during the 2020 COVID crisis has printed a literal flood of liquidity – aka “cash from thin air”. It’s plainly visible in the absolutely mind-blowing skyrocketing M2 number in the Shadowstats money supply chart. You can bet your ass that the “productive GDP growth” side of the US economy has not kept place with that Biblical flood of cash. And now we’re in a doom loop. “Biden” and Janet Yellen financed their four-year party spree by selling short-term rather than long-term Treasury paper. It’s rollover time. Who’s gonna buy 10+ trillion of US rollover debt in the next 10 months?
The Fed.
That M2 number, and the inflation rate it heralds, is a goin’ up up up.
Just like the 1970s, there is a stealth devaluation of the US dollar underway. Don’t hold dollar denominated stocks. Don’t hold dollar denominated bonds. Exchange your current investments for gold. And then you too can put on a bikini and go lying lazily around a pool.
Ricky-
I lived through that era and almost went belly up due to a CRE loan that went from 8% to 17% interest. Did a HELOC over my wife’s (at that time) protest that saved me. She wanted me to borrow from her (ugh) father.
There were two big differences from then. First, every nation wanted to buy our debt (well, not the USSR and China). Second, we had a large, but moribund, manufacturing economy that revved up due to junk bonds. Demographics were key as well – a sizable workforce of Boomers was waiting in the wings.
Once Carter was deposed and Reagan came in, there was a sense of optimism. He lifted the price controls on refined petroleum products that dated from Nixonian days, ending gas lines. Volcker did what needed to be done at the Fed, despite the pain lots of us suffered.
Things are really, really screwed up. The Fed had to monetize 20%+ of this week’s 10-Year auction, despite raising the rate to 5.1%. It’ll get worse.
Trump has been dealt Aces & Eights, and everyone wants to shoot him in the back.
True. But getting the truth and enjoying poolside ladies in minimal swimwear are not mutually exclusive. Indeed, the more truth you self-inflict, the greater the need of balancing it with beauty, I think.
Totally agree.
In fact, to celebrate gratuitous and unrelated bikini pictures here on John’s site, I have shot today’s example off to a satellite which will take a selfie of it with the Earth in the background. I’ll post it here when Crunchlabs completes the mission and emails me the link showing the final product. No kidding. You can do your own space selfie, too, while we wait.
https://space.crunchlabs.com/#
Hmmm, so you’re saying the bikini picture would be more accurate if she had big fake boobs?
100% correct Ricky…the shadow man has been telling the truth for 20 years and still no one hears him
First, if it’s not gratuitous, why do I enjoy it so much? Second, I agree.
Great insights as always, John, thank you!
Not sure what I can add here. Every time I think I’ve got a good understanding of market dynamics, something throws a wrench into my theories. That said, two thoughts came to mind while reading today.
Firstly:
“Oddly, the tariffs and deportations seem to have broken something and right now we have the lowest inflation in the last four years.”
It may be correlation without causation here. I’m wondering if the lull in inflation might be due to bankruptcy liquidations temporarily flooding markets instead. Not sure.
Second:
“There is no evidence of anyone wanting to increase our economy at the China-like rates we’d need to outrun this mess, and no appetite to cut the cost of government.”
How can we do the first? Our labor rates are so much higher that production would find limited demand at most unfavorable price points. Hard to compete with slave labor. While I know that the admin’s plan is tariffs, it strikes me as too little too late.
As to the second, if industry, or consumers, won’t borrow it’s Uncle Sam’s job to do it. The currency MUST continually expand or it will collapse and FEDGOV is the borrower of last resort. It’s important to remember the distinction that they don’t borrow in order to spend but, rather, spend in order to borrow. Unfortunately, the end game was certain the moment the first dollar was loaned into existence at interest. The timeline is anyone’s guess, but my gut says we are rapidly getting to the “climb the wall” part of this exponential function.
First: You’re right. Or the books are cooked?
Second: Keep in mind that the incremental labor costs between China and the US would only add about $10 to a typical iPhone. But you are right – it takes decades of investment in physical infrastructure and human capital to make the economy zoom. We’ve done neither.
Re: the bikini trend, you predicted I’d love this edition. As is so often the case, you were quite correct. Those nice bikini ladies make the world keep going around, even when so many other things are in the crapper.
More to come. I’ll stop being shy.
Things are far worse than the 1970s both because of the sheer volume of debt which really isn’t something most people can even comprehend and the demographic changes shaping America. More people who take from the system, fewer that pay into it, means the system collapse is going to accelerate.
Exactly. The US still had a strong foundation to build back from. Now? We are 24 hours of glitched EBT payments from most of our major cities burning down.
You say that like it would be a bad thing.
here’s a thought we had morals then too, no not the hippie dumbasses, they were given draft deferments to become teachers lol and they created what we have now. A bunch of people who don’t want to get dirty and can’t do much of anything
Well, at least we don’t have an enemy that’s a military rival but economically impotent. Our rival has a booming economy.
I’ve got another short story if you’re interested. If I did my job right, when you get to the end, you’re going to want to re-read the whole thing over again.
https://zaklog.substack.com/p/even-legends-bleed
Completely off topic, but a good story.
Mr. Wilder has graciously allowed me to post notices of a few things I’ve worked on here before. I try not to abuse the privilege, but I will take advantage of it once in a while.
You misspelled “encouraged”.
Loved it!
I’m not happy about financial assets, but I can’t see owning gold. “Gold-backed” finance is just more paper, and any of us will be waiting in line with the other creditors. Physical gold will attract unwanted visitors as soon as you start liquidating it to cover actual expenses. Take an ounce down to the retail shop, and somebody’s going to follow you home to see how many more you’ve got stashed away.
Just when gold was about to prove its worth (1933), your friendly federal government made doing business with it illegal (E.O. 6102). Sure, you could still legally hold 5 ounces of gold coins, but that was only worth $100. (Or, to put it another way, $20 was worth an ounce of gold, in 1933).
Personally, I guess I’ll just ride the slide, debt free, and taking good care of my solar panels, ham radios, sewing machines, garden tools, wood-working tools, metal-working tools, and reference books. All are not worth the effort to steal.
lol food/water first, weapons second, metal third and its simple you kill anybody that follows you, and that leads to number four a Kubota
They won’t care about gold this time.