Inflation or deflation? After ongoing debate, the fog is clearing and significant rises in the commodity arena – sugar, wheat, corn – are harbingers of the inflation that the Federal Reserve has sought. It also means that costs will be rising for the end users in the supermarkets. I’m young enough to have a kid in the primary grades but old enough to remember the inflationary 1970s and have been asking myself, what did families do to manage with inflation then? What are the best courses of action if inflation, whether stag- or hyper-, takes hold?
For those who are a bit fuzzy on the 1970s, inflation began prior to the decade when the consequences of funding both the Vietnamese War and the Great Society became apparent. Too much money was chasing through the economy and prices started to rise. Housewives protested the butcher shop when the price of hamburger began to hurt the food budget – where do you think Hamburger Helper came from? Prices however, rose across the board in a wide variety of items apart from food and inflationary expectations took flight. While everybody talks about the supply shocks of having oil supplies cut off in 1973 and 1979, the reality is that inflation was already alive and thriving. President Richard Nixon attempted to rein in the situation with statutory wage and price controls as far back as August 1971, a full two years prior to the first Oil Embargo. As you might expect, that effort failed – miserably. It took painfully high interest rates by then-Fed Chairman Paul Volcker to bring inflation to ground. In thirty years however, the company line on inflation has changed.
Understand that inflation is precisely what the Federal Reserve wants as it seeks to devalue the dollar. With no end in sight to out of control federal spending and a grotesque national debt, the plan is to devalue the dollar so that this debt is paid for in dollars that hold less purchasing, if not actually valueless; the presumption however, is that the spending will be brought under control so that the debt really no longer grows and can be ultimately eliminated with these faux dollars. The conventional thinking is also that the average family will return to spending – with renewed credit – as they use their dollars before they become further devalued. For the Fed, it’s a policy two-fer as consumption increases while the national debt and interest payments are rendered manageable. With the Volcker experience of the 1980s under their belt, the central bankers believe that they can bring inflation back under control after they’ve achieved the policy gains.
So, what did our parents and grandparents do during the inflationary 1970s?
First, they surely didn’t spend more, as the following graph demonstrates.
They went the opposite way, ratcheting up savings during periods of economic stress. Granted, not only had the average real income risen for decades previously, but the percentage share that the average US consumer spent on non-necessities (exc food, clothing, housing/affiliated expenses) had grown significantly. In 1934-35, the average US family spent 23.8% of it’s money on non-necessities while that rose to fully 49.9% in 2002-03.1
The surprising part of the savings increase though, is that it really didn’t come from the non-necessity category. The previous inflationary period was from the early 1970s to the mid 1980s; non-necessity spending as a percentage of total spending rose from 42.6% in 1972 to 48.6% in 1985. If savings during that period ranged from 8 to almost 12% while spending on discretionary items rose, where did the savings come from? It would have had to come from the necessities category of housing/food/clothing.
So what else did our parents and grandparents do?
Many of them went back to gardening and growing their own food to reduce the rising costs. In a 2009 USA Today article, an executive with a seed company noted that vegetable seed sales were fully 40% higher than in 2007 and they hadn’t "…seen this kind of spike in 30 years." Which places us back in the period when savings were peaking between 10% and 12% of income. One of the retrospectives at the time pertained to the Victory Gardens that their parents had grown to supplement the World War II war effort. Between this gardening and the subsequent low domestic food prices, the percentage of income spent on food dropped from almost 20% in 1973 to 13% in 2003. With an inflationary uptick in food and commodity prices, that percentage spent on food will rise upwards again unless families return to gardening on a scale reminiscent of the 1940s era.
Our parents and grandparents likewise made due with consumer durables, such as automobiles and appliances. Vehicles in the 1970s were nursed along so that a family had a vehicle for much longer than today’s family might. Cars and appliances would be repaired again and again until they really were at the point of complete breakdown. Legendary investment manager Peter Lynch once wrote that he realized that the auto industry – and by extension, the market – was ready for a run in the 1980s when he recognized how far along was the age of the typical American family vehicle.
They also were at a distinct advantage in terms of clothing costs. Sewing was far more prevalent then than today and families had fewer clothes – and repaired them more frequently – than would occur today. The percentage spent on clothing by the average family then, which was much larger than the 2.9 figure today, was 7.8% while as of 2003 had dropped by almost half to 4.2%. The Walmartization of the American economy is a principal cause of this as American textile jobs flowed overseas to regions with far lower labor costs so that mass market clothing, on a historical basis, became incredibly cheap. Think about it: when Junior rips a hole in the knee of his jeans, do you patch them or just get another pair at Walmart?
The impact of even relatively stable inflation would be significant, although there are things that we can do. We can manage to hold the line by:
- extending the lifespan of high-ticket items;
- re-thinking our clothing needs and shopping habits;
- shifting back to some self-sufficiency with our own gardens;
- simply deciding to forego some of the luxuries that have come to permeate our lives, such as the ever-present cup of Starbucks.
- understanding that true leisure time might be in short supply as non-work hours are taken up in the tasks necessary to tend gardens, cook more frequently and sew and mend more.
That’s within our immediate grasp. We need to also speak more forcefully and vocally about the policies that have brought us to this point, a central bank that’s been corrupted by a financial system and a government that cannot control itself.