Proclaimed to be the wisest man who ever lived, King Solomon, in the book of Ecclesiastes, wrote, “…There is nothing new under the sun.” This statement is particularly true when we consider the cyclical nature of economies. Armed with that knowledge alone, we can apply reasonably that the economic conditions of the past might again, one day, crop up given similar conditions.
“With groceries, gas, homes, and cars all costing more — and an uncertain future ahead — some economists believe there is a chance the U.S. may enter into a period of inflationary increases. That’s something most American managers and consumers have not experienced or had long since forgotten. I witnessed firsthand, as a young business leader during the 80s, the extreme inflation of the period; three decades later, inflation seems to be an unknown factor on business leaders. All inflation isn’t bad—a moderate amount can signal a healthy economy. But high inflation, such as that during the Great Inflation, can lead to a vicious cycle where expectations of higher inflation lead to further increases in the price level.” –Rob Ferguson
As younger generations enter the workforce and those from the Great Generation, Boomers and X’ers start to exit the workforce, what you have is a unique equilibrium. The experience earned by the older generations passed on to the younger generation taking the sting off the transitionary periods will hopefully help.
Philosopher, George Santayana, was believed to have coined the expression, “Those who do not learn history are doomed to repeat it.” To his credit and in line with the wisest man who ever lived, it is our most significant endeavor to look to the past to gauge the probable outcomes of the future. To this end, and in light of recent speculation, we thought it might do us all well to familiarize ourselves with a period in recent American history where inflation and unemployment reached epic proportions.
In a fascinating essay from the Federal Reserve History site entitled “Whip Inflation Now,” by Michael Bryan of the Federal Reserve Bank of Atlanta, Bryan notes that the Great Inflation was the defining macroeconomic period of the second half of the twentieth century. The Great Inflation spanned nearly 30 years (1965-1982), and with it came the realization that the Fed and other central banks needed to examine its then-current policies.
To put things into perspective, inflation in 1965 measured in at just over 1% per year. The previous half-decade prior was consistent with this measure. From that point forward, inflation began to run rampant, reaching more than 14% in 1980, only to decline again in the latter half of the ’80s. This inflationary crisis is nearly always attributed to the policies set by the Federal Reserve coupled with excessive growth in the supply of money.
Bryan continues the essay by talking about the motive, the means, and the opportunity for the Great Inflation to take root and wreak havoc. Bryan points out how Congress, who at the end of World War II, began to focus on policies that would enable a more significant, post-war, economic stability. During this time, the Employment Act of 1946 became law, putting the responsibility for promoting maximum employment, production, and purchasing power squarely on the shoulders of the Fed.
“This act is the seminal basis for the Federal Reserve’s current dual mandate to “maintain long run growth of the monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates” (Steelman 2011).
Still, the most critical error in the policies of the ’60s and ’70s was the assumption that there was an exploitable relationship between unemployment and inflation. The thought was that lower rates of unemployment could be ‘bought’ with increased rates of inflation. Policymakers hoped that the trade-off between lower unemployment and more inflation would be temporary, but as history shows, higher inflationary trends resulted.
During the 1960s, the Dollar, backed by gold under the Bretton Woods system established in 1944 in hopes to bring about more excellent economic stability and peace through international trade, furthered the strivings for a favorable unemployment-inflation nexus. However, with the demise of the Bretton Woods system and the world’s industrial nations supporting a global monetary system, the stage was set for the ensuing decades, which, economically speaking, were nothing short of tumultuous years.
In the latter part of the 60s and on into the 70s, the Great Society legislation enacted by President Johnson created major spending programs for social initiatives, which were all strained by the U.S. involvement in the Vietnam war, further exacerbating the precarious position of monetary policy in its time. Add to this an energy crisis, an Arab oil embargo, another energy crisis later in the decade, and what ensued was crippling prices at the pump as the cost of oil had nearly tripled.
“Motivated by a mandate to create full employment with little or no anchor for the management of reserves, the Federal Reserve accommodated large and rising fiscal imbalances and leaned against the headwinds produced by energy costs. These policies accelerated the expansion of the money supply and raised overall prices without reducing unemployment.” (Bryan, 2013)
In hindsight, most economists would agree that the data, or its interpretation regarding inflation, was significantly flawed and overstated. At the same time, unemployment was highly understated to the point that both inflation and unemployment were unacceptably high.
“This, then, became the era of “stagflation.” In 1964, when this story began, inflation was 1 percent and unemployment was 5 percent. Ten years later, inflation would be over 12 percent and unemployment was above 7 percent. By the summer of 1980, inflation was near 14.5 percent, and unemployment was over 7.5 percent.” (Bryan, 2013)
Fast forward to 2020–2021, and an unprecedented event that may shape the future of business well into the next decade. Of course, we are referring to COVID-19 here. Not unlike the Great Inflation era, today’s economists and the Fed are working with new ambiguities, and the tale-tale signs of inflation are again on the horizon. So what can we learn about doing business today from the leaders of yesteryear?
It seems apparent that we are heading into a period of high inflation. If you aren’t old enough to remember conducting business in the 70s and 80s, you won’t be able to appreciate fully how drastically the economy changes when inflation rises above 6–8%. But according to many economists, that is our inevitable future. With inflationary pressure rising and an apparent, looming Catch-22 (where the government can react but will likely use inflation as a tool to pay down debt with cheaper dollars), along with a spike in the consumer price index, what can business owners do to get ahead of the game?
Consider acquiring hard assets. Although it is not usually advisable to load up on unnecessary debt, anything you acquire now (at a fixed rate) can be paid off with cheaper dollars.
Extend leases and contracts. Doing this will lock you in at current prices. And while it is better to own than to rent, for obvious reasons, if you do rent, it would benefit you to see if there are options for getting an extension to your lease. Your landlord will appreciate the business in the current environment believing it to be a fair price. Then in the following years, you won’t need to renegotiate at the future rate.
If possible, raise your prices. Even if you commit to raising your prices 1–2% per year when inflation spikes, you won’t be forced to hit your clients with a seemingly more significant increase all at once. If your competition is forced to increase their pricing all at once, you will have the apparent advantage and get more of the market share at the expense of your competition.
Do what you can to retain your best people. Good help truly is hard to find, and your competitors will be coming after your best people. As your employees begin to feel the pinch of higher prices, compensation is everything. The fact is that there is nothing more costly to your business than turnover, and truth be told; you will likely end up paying more to replace a valued employee than you would be retaining them. Of course, we are not throwing caution to the wind and suggesting pay raises for everyone. Still, other nonmonetary factors contribute to your employee satisfaction that you might consider to keep your best talent from jumping ship. Some initiatives may include improving your corporate culture, creating opportunities for training, and implement a bonus plan for inflationary times, to name a few. These small steps will prove beneficial and keep your employees attention on you when a competitor attempts to recruit from your talent pool.
Keep your edge by refocusing your company mission and value proposition. Focus on your value statement so that it is appealing to your customers even when they know they will have to pay more tomorrow for what they got for less today. Focusing on your mission will prevent you from chasing business that is not in your main wheelhouse. It will help curve your temptation to discount to preserve your top line, and keep you from minimizing payment terms at the wrong time.
Consider advances in your digital strategy. Marketing is essential for any business desiring to capture its market share by being in front of actively engaged consumers at the point of decision. Advances in digital strategy make this possible. Instead of taking the approach that many businesses will take out of fear and cut their spending to marketing, do the opposite and invest in your marketing during times of economic uncertainty. The goal is not to do away with marketing but to reduce marketing waste by honing more qualified prospects. With strategies like reverse IP lookup and marketing automation tools, you can spend less time acquiring new customers and more time servicing them.
Finally, learning how to avoid the pitfalls of the past requires knowledge and experience of history. Having someone on your team who is knowledgeable and experienced in handling the nuances of inflationary periods is priceless. But, as we mentioned at the onset of this article, many of these experts are leaving the workforce for retirement in droves. Still, there are many from this cohort who will go on to offer consulting services at reasonable rates. With their experience and expertise, your business will stand to benefit while your competitors flounder.
Ferguson Interests has the experience and necessary tools to help you achieve your financial and business goals during inflationary periods and can advise you on ways to improve your ability to not only stay afloat but surpass others in your industry. Making investments in your company during inflationary times seems counterproductive. Still, the reality is those who invest in their businesses during these times are putting themselves ahead of the game and their competition when things begin to stabilize and prosper.