Investments: The Price of Killing Inflation
When looking for the blueprint on how inflation can impact the U.S. economy, there is no better example than the stagflationary period of the 1970s. During that time, several forces converged at once and brought on one of the worst inflationary crises our country has ever seen. Government spending was incredibly high, largely in part to the Vietnam War and the prolonged period of elevated military spending. As mentioned in my previous Angle, the early 1970s saw the end of the Bretton Woods system, bringing an end to dollar convertibility to gold and resulted in a period of less restrictive monetary conditions. Other geopolitical factors in the Middle East, such as the Arab oil embargo of 1973 and the energy shock associated with the Iranian revolution of 1979, made inflationary matters worse. By the late 1970s, after almost a decade of persistently high prices and a steady loss of credibility for institutions like the Federal Reserve, the cost of inflation was becoming increasingly apparent. A change needed to be made, and that change came in August of 1979 when Paul Volcker became chairman of the Federal Reserve. In October of 1979, just two months after getting sworn into office, Volcker announced a major change in the way the Fed would do policy, placing a greater emphasis on restraining money supply growth. To break the back of inflation, Volcker needed to take drastic measures, and did so by raising the Fed funds rate to 20% in late 1980. This made borrowing incredibly expensive, rapidly weakening demand and changing people’s expectations about inflation. This did not come without a cost, as unemployment spiked over 10% and industries such as housing, manufacturing, and banking struggled mightily. However, by late 1982, inflation had fallen significantly and the Fed began easing rates, leading to a period of stable inflation and increased economic growth. When looking at today’s inflationary landscape, there are some similarities but also differences to the stagflationary period before the “Volcker shock”. Today’s inflation is largely due to an increase in energy prices resulting from the war in Iran and the aftermath of post-Covid inflationary pressures, but it has yet to reach the systemic levels it did in the late 1970s. The main concern for investors going forward is whether inflation reaccelerates and how restrictive monetary policy will become if it does. The biggest takeaway from the Volcker shock is that even though fighting inflation can be painful, allowing it to persist can be even more costly. As investors navigate today’s inflationary environment, the key will be whether these pressures prove temporary or force the Fed to maintain restrictive policy. History has shown that the price of restoring stability can be high, but so too is the cost of losing it.
Sources: Federal Reserve History 11/22/2013
Planning: Beyond the Algorithm
AI can serve as a helpful starting place when asking financial questions, organizing different ideas, and learning new concepts. However, a confident and thorough answer is not always a good answer. AI chatbots such as ChatGPT, Google Gemini, and Claude oftentimes overlook important details, rely on outdated or inaccurate information, or offer answers that don’t take your whole financial picture or relationships into consideration. When using AI platforms for financial planning purposes, it is important to bring those ideas to your advisor before acting on them. One of the most important aspects of financial planning is the connection between the advisor and the client. Understanding your goals, values, family responsibilities, and concerns are all something that an AI chatbot can’t truly comprehend or empathize with. AI should not serve as a replacement for advisor judgement. A meaningful planning relationship allows room for thoughtful questions, honest conversations, and guidance that changes as life changes. Proverbs 15:22 reminds us of the value of wise counsel. At Anthem, we believe that although technology can support the planning process, implementing sound judgment remains essential. AI can be used to help prepare your questions while letting trusted counsel help you weigh the options and sequence of next steps. Ultimately, knowledge is not the same as experiential wisdom.
This material is provided for informational and educational purposes only and should not be construed as personalized investment, legal, tax, or accounting advice. Advisory services are provided only pursuant to a written advisory agreement. Information contained herein has been obtained from sources believed to be reliable; however, we do not guarantee its accuracy or completeness.
