A few days ago, I was talking with a friend of mine, a successful entrepreneur who has been at it for a while now, and he expressed concern about the rapidly rising costs he’s facing lately — just like every other American today.

That’s a large enough problem on its own, but he shared that he is also being squeezed from the other side by declining consumer confidence. Essentially, because of inflation, stagnant wages, and uncertainty in the direction of our economy, people are slower and more cautious when it comes to spending money.

As a result, he’s being forced to make changes in his business to keep it afloat, which will affect not only his family and employees, but also a wide range of others, including vendors, contractors, other businesses he and his employees buy from, and even local government, to name a few. And his story isn’t unique, unfortunately. I hear similar stories from people from all walks of life every single day, and it’s getting both more frequent and more severe.

The economic environment we’re now facing closely resembles the brutal stagflation we faced in the 1970s, which devastated our economy and the lives of millions of Americans in the process. But before we get into exactly what that is and how it impacts all of us, let’s first unpack how we ended up where we are, economically, today..

During the 2020 global recession, global growth collapsed, but then rebounded to 5.7% in 2021 due to fiscal and monetary policy accommodation. Throughout 2022, weak growth and elevated inflation mimicked the economic stagflation of the 1970s, and as in the 1970s, an era that ended with a global recession and a series of financial crises, the economists and policymakers of 2022 battled with the consequences of rapidly tightening financing. The Fed then spent much of 2022 and part of 2023 increasing interest rates in an attempt to curb inflation, which was expected to slow down the economy.

Though inflation has come down, since the Covid pandemic, the U.S. economy has witnessed steady growth. GDP in Q3 2020 was $21.4 trillion. As of Q2 2023, it was $26.8 trillion: a growth of 25%. However growth is expected to slow through 2024 because of the wars in Israel and Ukraine, the easing of demand, and the withdrawal of policy support amid high inflation.

What is stagflation and how is 2023 similar?

In the 1970s, the US entered a stagflation period, which is defined as persistent high inflation combined with high unemployment and stagnant demand in a country's economy. This is a proverbial perfect storm and it has a devastating effect on the economy.

During this time, America was faced with massive inflation and inconsistent economic growth. The 1970s was the decade of inflation in the United States. While it may be surprising to some that the average inflation rate for the decade as a whole was only 6.8%, it was double the long-run historical average and nearly triple the rate of the previous two decades.

Another similarity between the 1970s stagflation period and today is unbridled government spending. Back then, we had the Great Society programs, ushered in by Lyndon Baines Johnson, our 36th president, who was more commonly known as LBJ. More recently, we all had front row seats with the pandemic “stimulus” and the so-called “Inflation Reduction Act” among numerous other smaller programs. This exponentially increased the out of control spending our policy makers are engaged in, resulting in a massive increase in our already sustainable debt.

And the similarities don’t stop there. Back then, we had the Vietnam War, while today we now have the Russia/Ukraine and Israel/Hamas conflicts, which create a unique set of challenges to the economy, including increased oil prices, and in extreme circumstances, even shortages and rationing of everyday essentials. These are all very real possibilities, particularly if the current conflicts further escalate.

Ultimately, the 1970s was a period of high budget deficits,rising interest rates, the oil embargo, and the collapse of managed currency rates, which all contributed to stagflation — and all of which we’re facing today.

How is our economy affected today?

A full 70% of the GDP is consumer spending, so it shouldn’t surprise anyone to learn consumer confidence has an adverse effect on this key metric. People today simply don’t have the disposable income they once did.

Consumer sentiment fell for a third consecutive month in October according to the final report for the Michigan Consumer Sentiment Index. The index came in at 63.8, down 4.3 points (-6.3%) from the September final. This index is a monthly survey of consumer confidence levels in the U.S. with regards to the economy, personal finances, business conditions, and buying conditions, conducted by the University of Michigan.

In other words — we have a real problem and everyone knows it.

Just how bad is it? Well, for the first time in history, home buyers need six-figures ($111.000) just to afford a home. Meanwhile, the median income in the U.S. is $78,000, and this "gap" is more than double what we saw in the 2008 global financial crisis. We’re facing an affordability crisis with average the interest rate for a 30-year mortgage at 8.09%, the highest it’s been since July, 2000, and as a result, mortgage applications are 25% below the lowest levels seen in 2008 at the start of the last housing crisis.

We’re also seeing an impact, perhaps even more so, in individual budgets. Credit card delinquencies are rising at the fastest pace since 1991, and they’re up almost 60% since 2022, and auto loans delinquencies are at the highest level since 2012. To make matters worse, all excess savings from the Covid “stimulus” are set to run out by the end of 2023 and student loan payments resumed this past October, with the average payment around $500/month. And now, we're also funding two proxy wars overseas.

The Misery Index, a measure made up from a combination of unemployment and inflation, was at its highest under President Carter in the late 1970s, spiked again in 2020, and is rapidly trending up again. One of the tactics used to combat this is to increase interest rates in an attempt to bring down inflation. Unfortunately, while keeping interest rates higher for longer helps to beat inflation back down, it causes immense pain to the economy, as we’re already seeing. As a result, the S&P and Nasdaq have officially entered correction territory, which shows up as declining stock prices.

Core inflation is running at 4% today, which is twice the Fed target and still not an accurate representation of what consumers are really facing because the formula used to calculate it has been heavily manipulated to look like the country is doing better than it is. To make matters worse, oil and natural gas prices have spiked in the last sixty days and our national debt is on the move to $34 trillion, with $2T deficit spending in 2023 alone, creating a stronghold that makes inflation even more sticky.

How should consumers prepare for stagflation?

Now that I’ve painted a pretty terrifying “doom and gloom” picture of the economy we’re facing today, let’s talk about how to prepare and adapt so you can survive through it. The reality is that while this can be a scary and uncertain time, it’s not the first time we’ve been in this situation and there are proven strategies we can implement to soften its impact and not only survive, but potentially thrive financially.

First, you’ll want to reduce your lifestyle budget where you can. Start with large expenses like vacations, automobiles, and other unnecessary purchases because these things will have the biggest impact on your budget. But then, move on to the smaller expenses, which add up surprisingly fast. Most Americans subscribe to a few different streaming services, eat out regularly, and have a few apps that come with a subscription fee. If you invest a little time digging through your bank and credit card statements, you’ll almost certainly find lots of little recurring costs you can eliminate.

In analyzing your expenses, be on the lookout for any variable rate debt specifically, and pay it off as fast as possible because it will become even more expensive as interest rates go up. And I usually tell people that it makes more sense to pay off consumer debt before investing, but that doesn’t apply to building your savings, so next, you’ll want to do everything possible to accumulate savings that can carry you through six months of expenses. This will help to insulate you from cost increases, potential job loss, and other emergencies. Ideally, it should be kept in an account that offers a higher interest rate and is at a different bank than your main account(s). Doing this helps to offset the eroding effect of inflation, and more importantly, helps reduce the chances that you’ll tap into it for frivolous purchases.

Finally, you should invest in yourself to become more valuable and indispensable to your employer, or if you run your own business, your clients. This doesn’t necessarily mean going back to school, and in most cases, that’s not the best approach anyway because fewer employers care about college degrees these days. Instead, focus on building useful skills that can be easily demonstrated and you can learn on your own through books, YouTube, and courses. This might include skills like:

• Inbound/outbound sales
• Programming
• Negotiation
• Digital marketing
• Leadership
• Conflict resolution

The idea is to learn additional skills that you can leverage to bring more value and as a result, become a greater value to your employer or clients. It’s important to identify the needs not currently being filled in your environment and find ways to fill them, making yourself more indispensable.

The road back to “normal”

We’re facing scary and uncertain times, but this is not uncharted territory. Those of us who are a bit older have experienced these difficult economic environments several times throughout our careers, so we know this is just another cycle. The key to surviving, or better yet, thriving through this is to understand exactly where we are, how we got here, and how to adapt. Armed with that information, you’ll be empowered to make more effective financial decisions.

The problems we’re up against can’t be fixed overnight. More likely, they’re here to stay for the foreseeable future, measured in years rather than months, so we need to be prepared to be in this for the long haul.

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Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.