Shine Trader Live reports:
The two stagflation in the 1970s was the result of the resonance of strong demand, shifting manufacturing and insufficient supply. In the 1970s, the baby-boomer labor force and the relatively high middle class led to strong demand in the United States, and the large-scale shift out of manufacturing was the main reason for the “stagnation” in the United States. At the same time, two oil and food crises have sharply reduced America’s domestic supply of goods. In addition, imported inflation in the United States was exacerbated by the sharp depreciation of the dollar index after the dollar depegged from gold on August 15, 1971.
Back then the Federal Reserve was loosening and tightening to fuel stagflation. In 1973, the Fed delayed its interest rate hike because it was too dovish and inflation gradually got out of control in the 1970s, so it had to raise the benchmark interest rate quickly and sharply after starting the interest rate hike cycle. This process led to a rapid rise in the financing cost of American enterprises in the short term, which not only restrained capital expenditure but also accelerated the shift of manufacturing out of the United States, which was an important driving force of the US economy into recession. In 1977 the Fed changed tack and raised interest rates early, but continued high inflation proved another failure, with inflation and unemployment rising at high levels and monetary policy temporarily seized up under the pressure of rising costs and falling productivity.
Given the three-factor resonance, the us inflation centre is indeed expected to be significantly higher over the next eight years than it was from 2010 to 2019. 1) The world has entered the second half of the fourth round of industrial transfer, the inflation center is already higher than before the EPIDEMIC, and factors such as new industrial competition in the United States and major economies will boost the demand for real assets; 2) Labor supply or marginal decrease in the service sector, and the probability of service inflation center is higher than before the epidemic; 3) In the context of the Biden administration’s encouragement of new energy and restraint of shale oil, the crude oil price center will also rise for a long time.
But in the coming years us demand will be much weaker than in the 1970s, so inflation will pick up only modestly, not in a high inflation environment. In the next 10 years, the growth rate of the working-age population in the United States will gradually recover, but it will be significantly lower than the level of the 1970s, so the consumer demand will not be as strong as that of the 1970s. In addition, the current American social structure is in an extreme state, the gap between the rich and the poor is huge, and the proportion of the middle class has dropped to a historically low level. The “tax increase” policy after Biden takes office may reverse this situation and promote the proportion of the middle class to rise again, but the initial recovery cannot reach the height of the 1970s. Therefore, both in terms of age structure and income structure, the future domestic demand in the United States is not bad, but not as strong as in the 1970s.
It is difficult to repeat the situation of recession caused by the large shift of manufacturing industry, and it is even expected to rebound in the proportion of manufacturing industry. The probability of a sustained recession in the US economy is also low. The epidemic has not only distorted the short-term economic structure, but also made all countries realize the risk of supply chain “bottleneck”, and Biden will enter the new industry expansion phase after the epidemic. Given the combination of real estate, infrastructure and new industrial policies, the United States will not repeat the massive shift out of manufacturing in the 1970s, and its manufacturing share is expected to increase in the coming years. Therefore, we do not believe that the U.S. currently has long-term stagflation supply and demand conditions.
Reprint indicated source：Shine Trader Limited Live information