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Why Jeremy Siegel Doesn’t Think We’re in for a Rerun of ’70s Stagflation
- Jeremy Siegel sees inflation tapering off within a year and opportunities out there for investors.
Even if the inflation rate just reached the highest level in four decades, we aren’t in for a replay of the painful stagflation experience of the 1970s, according to the economist Jeremy J. Siegel.
Siegel, author of the seminal market study, “Stocks for the Long Run,” says the two periods are “very different,” mainly due to the relatively rapid response of today’s Federal Reserve. Siegel says he sees inflation tapering off within a year, and opportunities out there for investors.
“Today’s valuations look quite attractive,” says the Wharton School of the University of Pennsylvania professor emeritus of finance. “I won’t predict we’ve hit bottom, no one can, but an investor in this market may be well rewarded.”
The difference between this inflationary period and that of the ‘70s, Siegel says, is that the Fed “stopped the growth of the money supply this year, very dramatically.” That was not the case during the Great Inflation (1968-1983).
Over those 15 years, the Consumer Price Index surged 186%, or 7.3% annually, exacerbated by two oil crises that also slowed the economy and increased unemployment. This painful condition was dubbed stagflation.
No determined effort was made to crimp the money supply until after Paul Volcker took over at the Fed in 1979. He pushed the fed-funds rate over 19% (the Fed’s current target rate is 1.5% to 1.75%), causing two painful recessions. But the remedy ushered in a long, stable period for both inflation and unemployment.
Siegel blames today’s bout with inflation on the pandemic and Washington’s response to it.
“The money supply growth in 2020 was the greatest in the 150-year history of data that we have,” Siegel says. “Instead of handing the money to the government for all these spending programs under Trump and Biden, the Fed should have told them, if they wanted to enact those programs, they should have gone to the bond market. That’s not inflationary.”
As it is, Siegel suggests that “a lot of the inflation we’re seeing now is ‘pipeline’ inflation that has already passed, but won’t get into the statistics for some time. There’s a lag.” Real estate, for instance, has probably already seen its biggest increases, he says.
While we may already be in a technical recession, Siegel foresees a relatively soft landing, depending on how soon the Fed “eases up” after the expected July interest rate hike.
In any case, our landing “will be nothing like” the one after the Great Inflation, he says. “We’re in much better shape than they were.”
https://www.barrons.com/articles/jeremy-siegel-inflation-stagflation-economy-51657750423?tesla=y