Many of you are aware of Marketwatch’s love of history. We can learn much from it, even if those lessons do not seem to prevent constant stupidity by those who should know better. So settle down, get a glass of brain food, and join me on another trip down memory lane.

In the late 1960’s in the United States, troubling signs began to emerge in the ever-almighty economy. Unemployment had risen by 33%, while the consumer price index (aka inflation) had gone up by 11%. At the same time, real wages began to stagnate. Simultaneous inflation and stagnation, nicknamed stagflation, puzzled economists; usually when wages fell, process also fell, and when wages increased, prices increased. But not in the 1970’s. As a result, Americans had less purchasing power, and increasingly expensive US exports were at a disadvantage in the international market.

Why did this happen? The massive cost of the war in Vietnam and the expansion of social programmes without commensurate tax increases helped to drive inflation. Meanwhile, US manufacturing (especially car manufacturing) had become less competitive over time compared to efficient overseas rivals, particularly in Germany and Japan. More and more American jobs were in the service sector, which had lower wages and fewer benefits than manufacturing jobs. Individuals born on the tail end of the baby boom found themselves competing in a very crowded labour market, especially as more women and immigrants entered the workforce.

In 1971, Richard Nixon attempted to remedy inflation by imposing a 90-day wage and price freeze. At the same time, he attempted to boost American exports by taking the dollar off the gold standard, devaluing the currency. These measures resulted in a short-term improvement but did nothing to address the tangled roots of the problem.

Then the energy crisis hit. In October 1973, the United States supported Israel after a surprise attack by Egypt and Syria in the Yom Kippur War. The oil-rich nations of the Middle East, already angry with the United States for devaluing the dollar (the currency used to purchase oil) determined to exact their revenge with an oil embargo. Led by Saudi Arabia, the Organization of the Petroleum Exporting Countries (‘OPEC’) announced an oil shipping embargo against the United States as well as Israel’s European allies.

The effects were immediate and dire. The price of oil shot up to $11.65 per barrel, an increase of 387%. Lines miles-long formed at petrol stations. The United States consumed one third of the world’s oil, and its citizens quickly discovered just how much of daily life depended on cheap oil. Families living in far-flung suburbs depended on cars to get everywhere. Even after the embargo ended in March 1974, prices for oil remained about 33% higher than they had been before the crisis.

Fast forward 50 years.

Although the parallels are not exact the dreaded word “stagflation” has reared its ugly head again. In many countries, inflation has surged as the world absorbs the many economic issues posed by the war in Ukraine and the seemingly never-ending saga of COVID-19. At the same time growth in many countries is slowing.

We have already discussed in previous articles that raising interest rates can have two very different effects. On the one hand it can be an effective, if blunt, tool to reduce inflation. But at the same time, increases in interest payments hits those who are highly indebted, households and businesses. Faced with this, other expenditures are reduced, consumption goes down, and economic growth slows.

The trick for the central banks is to reduce inflation, accept a reduction in growth, but actually avoid a recession. This is harder than it seems. The rapid growth in inflation and the slowing of growth has taken place over a relatively short space of time so authorities are scrambling to get ahead of the game. We noted last month that they should have seen it coming but that is of little comfort now.

The US is clearly the worst performer. There is a significant gap between rising inflation and deteriorating growth. Australia, on the other hand, has the same problem but of much less severity. That is not to say that the Reserve Bank has an easy task. As I write, the RBA have just increased rates to 0.35% from 0.10%, and is forecasting moving to 2.50%. This is still a long way from rates of previous years but whether or not it is sufficient is hard to tell, the RBA governor is not committing himself.

Generally speaking, Asian inflation is much less than western countries, but food prices are starting to have an effect. China seems to be maintaining inflation at just over 2.0% with growth slowing, albeit at a much higher level. You can do this sort of thing when you can significantly influence prices.

So what do stock markets make of it all? Well, because the technology sector, the darling of the markets, tends to be more indebted, it has been punished as interest rates move upwards. 6 months ago the index stood at 15,982. On May 2nd it was 12,536. That’s a 20% depreciation and is very significant.

Elsewhere, the S & P 500 has gone down by 11%. In Australia, the ASX 200 has performed better being 2% down, with the All Ords turning in a similar performance. All in all, investing is not much fun at the moment. Unless you are Warren Buffet and you are sitting on an eye-watering pile of cash.

Last month we said buckle up for a rough ride. Welcome to the rollercoaster.

Marketwatch has returned his taste buds to one of his favourite regions, Coonawarra. For those cold evenings, I recommend you try the Hamilton Block Cabernet Sauvignon. Very reasonably priced and a nice, but not chest-thumpingly gorgeous, drop. Enjoy.