Back to the 70s: That Was Then, This Is Now

(Stephen Poloz, Export Development Canada)

Those of us with grey hair have noticed that there are a lot of parallels between our current economic situation and that of the 1970s. But there are differences, too, and these are important enough to suggest that things will be different this time.

The similarities with the 1970s are obvious. High prices for oil, gold, base metals, food and fertilizer. A weak U.S. dollar. War, then in Viet Nam, now in Iraq and Afghanistan. Concerns about inflation, combined with worries about recession - the stagflation recipe. Not to mention a fast-growing economy changing the global landscape - then it was Japan, now it is China.

And some of the differences? Start with oil. In the early 1970s, the world used 1.3 barrels of oil per $1,000 of GDP, whereas today it uses 0.8, 40% less. The U.S. has more than halved its oil intensity, from 1.5 barrels to 0.7. And China, forecast by many to exhaust the world’s supply of oil, has seen intensity fall from 4 barrels to 1.3. China is very likely to reduce its oil intensity at least to global levels during the next 10 years, and may go further, as Japan has done. Accordingly, it is folly to extrapolate China’s demand growth as if nothing else is going on, just as it was wrong to extrapolate Japan’s oil demand in 1980.

Same thing for copper. Copper sold for U.S. $6800 per tonne in 1974, and the book “The Limits to Growth” published by the Club of Rome predicted that the world would run out of copper by 1999. Instead, the price had fallen to under $2,000 by 1999, as new supplies and substitutes emerged. Prices are back at 1970s levels again today, and another decline in prices is in store.

The world economy has changed in other important ways, too. Populations of the major economies are a lot older, so they react differently to shocks today, behaving more as investors than as consumers. Economies are more integrated internationally, as trade now represents 60% of global GDP, as opposed to 30-35% in the early 1970s. Economic and financial synchronization is the new paradigm, not decoupling. Even economic theory has changed. Economists’ understanding of inflation and central banking have been advanced dramatically, due in no small part to the experience of the 1970s. Indeed, the 1970s were arguably just as important to economic thinking as the 1930s.

And then there are the usual concerns about war, fiscal deficits and the consequent forecast demise of the U.S. dollar. U.S. defense spending was running at 8% of GDP in the early 1970s, and it was to fall to a low of 3% in 2000. It has risen since then, but only to 4%. But one parallel that is likely to hold up is that today’s calls for the U.S. dollar’s demise are just as premature as those of the 1970s proved to be. The dollar cycles inversely to global business and commodity cycles, and always will.

The bottom line? It’s true, there are a lot of similarities with the 1970s. But that was then, this is now. The 1970s ended in tears, and there is much less reason for this decade to do likewise.