Inflation is EXACTLY Following the 70's - But They Can't Afford it This Time

Key Concepts

• Inflationary Parallels: The comparison between the 1970s inflationary cycle and the current post-2014 economic environment.
• Sovereign Debt Crisis: The risk posed by high debt-to-GDP ratios (currently ~122%) when interest rates rise.
• Yield Curve Control (YCC): A monetary policy tool where the central bank caps interest rates on government bonds to manage borrowing costs.
• Supplementary Leverage Ratio (SLR): A regulatory requirement for banks; its suspension or elimination allows banks to hold more debt, effectively acting as a proxy for Quantitative Easing (QE).
• Boom-Bust Cycle: The economic phenomenon where artificial credit expansion leads to temporary growth followed by inevitable contraction.

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1. Inflationary Patterns: 1970s vs. Today

The video argues that current inflation is tracking the trajectory of the 1970s.

• The 1970s Path: Inflation rose moderately starting in 1966, spiked to 12% after the U.S. left the gold standard (1972), bottomed in 1977, and peaked at over 14% in 1980.
• The Current Path: Inflation began rising in 2014, stalled around 2018, and skyrocketed following the 2020 money-printing surge.
• Discrepancy in Scale: While the patterns align, the y-axis values differ. The 1970s CPI peaked at ~12–14%, whereas the current cycle peaked at ~9%. If the pattern holds, the current CPI could reach 10–11%. The speaker notes that modern CPI measurement methodologies may be "skewed" to appear lower than historical equivalents.

2. The Federal Reserve’s Dilemma

In the 1970s, the Fed successfully curbed inflation by raising the federal funds rate to nearly 20% by 1981. However, the speaker argues that "this time is different" due to the national debt load:

• Debt-to-GDP Ratio: In the 1970s, the U.S. debt-to-GDP ratio was approximately 30%. Today, it exceeds 120%.
• Fiscal Constraints: The government currently pays over $1 trillion annually in interest. Because federal receipts (tax revenue) consistently hover around 17–20% of GDP, the government lacks the fiscal space to sustain high interest rates without triggering a default or a severe economic crash.

3. Proposed Methodologies for Resolution

The speaker outlines three potential "playbooks" for the Federal Reserve:

• The 1970s Playbook (Raising Rates): Deemed impossible because the government cannot afford the interest payments on its current debt.
• The 1940s Playbook (Yield Curve Control): Used after WWII to deleverage. This involves the Fed capping long-term Treasury yields. However, this requires expanding the Fed’s balance sheet, which contradicts the stated goals of incoming Fed Chairman Kevin Walsh, who aims to reduce the balance sheet.
• The 2020 Playbook (Bank Deregulation): The speaker predicts the Fed will permanently eliminate the Supplementary Leverage Ratio (SLR).
  • Mechanism: By removing restrictions on how many Treasuries banks can hold, the Fed encourages banks to buy government debt.
  • Outcome: This pushes bond prices up and yields down without the Fed needing to expand its own balance sheet directly. It effectively allows banks to perform "QE for the Fed."

4. Economic Outlook and Implications

• Short-term Boom: If the Fed successfully lowers yields through bank deregulation, it could lead to cheaper mortgages, auto loans, and corporate debt. This increased cash flow could stimulate research, hiring, and production, potentially leading to a period of economic and stock market growth.
• Long-term Risk: The speaker warns that this growth is fueled by "artificial credit expansion." While it may provide a few years of prosperity, it reinforces the boom-bust cycle, suggesting that a significant correction will eventually follow.

5. Notable Statements

• "The higher inflation goes, the more maybe the Fed wants to raise interest rates like they did in the 70s. But the more they do that, the more expensive government debt gets."
• "Even if inflation starts following this exact same path that it did in the '70s, they cannot follow the same playbook... they have to go back to the 1940s playbook."
• "Ironically, if they can do this [bank deregulation] and get interest rates lower... that may be actually what stops inflation in its tracks this time."

Synthesis

The core argument is that the U.S. is trapped between high inflation and an unsustainable debt burden. Because the Fed cannot raise rates like in the 1970s without causing a sovereign debt crisis, and cannot easily implement 1940s-style yield curve control due to balance sheet reduction goals, the most likely path is the permanent deregulation of the banking sector. This would artificially suppress yields and stimulate the economy, creating a temporary boom at the cost of long-term structural stability.