‘Bear Down’ and ‘Be as Frugal as you Can’: Baby Boomer Financial Experts who Survived The Great Inflation Share Tips to Ride out a Recession

'There's no way around it. You just have to get through it.'

It was a time of big hair, shoulder pads and the Cold War. But something often forgotten when being nostalgic about the ’80s, was the interest rates that were high enough to make you dizzy.

“The interest rates started the decade around 20%,” says Brad Lyons, a certified financial planner and an investment manager at Wiser Wealth Management based in Georgia. “They had [raised] them dramatically in the late ’70s … trying to deal with inflation.” Lyons was in his early 20s at the start of the 1980s. And though today’s rising interest rates still look small in comparison, there’s a lot that can be learned from people who’ve been through it.

Consumer prices rose 5% in December from a year ago. That’s down from a 40-year high of 9.1% in June. Still, inflation like this haven’t been seen in decades. And people who remember the ridiculously high interest rates that followed the high inflation of the ’70s say buckle down and be prudent, because we’re in for a long haul.

The average inflation rate in the 1970s was 6.5% per year, which was much higher than the following decade. The average mortgage rate in 1981 was 16.63%. On August 12, 1981, the Federal Reserve raised its benchmark interest rate to a historic high of 20%, which was a response to the high inflation rates of the time.

The residential real estate market during the Great Inflation of the 1970s and 80s saw a surge in owner carry loans due to the extremely high mortgage rates. Experts draw parallels between this era of high inflation and the current economic situation. The inflation was caused by various factors such as low unemployment and the removal of the gold standard, but it was the high energy prices that pushed it to the extreme. In 1973, the OPEC enforced a harsh oil embargo on the United States and other countries supporting Israel in the Yom Kippur War, leading to a quadrupling of oil prices and various ripple effects that caused inflation and stagnation. Later, the Iranian Revolution of the late 1970s again resulted in soaring oil prices. By 1980, inflation had reached 14.5%, and unemployment had risen to 7%. To tackle the issue, the Federal Reserve raised the federal funds rate to an unprecedented 17%, making it almost impossible for people to keep up. According to Mike Drak, a former banker from the era, his mortgage rate was as high as 17.5%. "Rates were going up monthly, and it never seemed like it would end," Drak says. "I remember saying, 'If I could find a mortgage rate for 10%, I'd be the happiest person in the world.'"

Drak notes that during the inflation of the 1970s and 80s, debt rocketed up rapidly, from houses to credit cards to vehicles. The times were tough and fearful, but he and his partner were fortunate to have jobs with increasing wages, requiring them to work together at different paces to alleviate their debt. Drak emphasizes that paying down debt is one of the most crucial measures to take during periods of high interest. He explains how his goal was to reduce his mortgage at the time, which was a daunting task. Drak stresses that discipline is crucial in this situation, noting that it is vital to make annual lump sum payments to keep high-interest rates at bay. The latest episode of The Blind Economist focuses on raising your credit score to 800 by making weekly lump payments such as Drak suggests.

One recommendation from Brad Lyons is for individuals to steer clear of credit card debt, specifically. Lyons suggests paying off as much debt as possible, within one's means. While paying off debt may sound intimidating, there are several techniques to employ, such as the snowball and avalanche approaches.

Another recommendation from Lyons is to avoid tampering with investment accounts, particularly during times of dropping numbers. Although people dislike seeing the values of their retirement accounts decrease, this period can provide younger generations with opportunities to invest at lower prices, if feasible. Lyons underscores the importance of remaining invested and adhering to one's predetermined asset allocation strategy to achieve specific goals and objectives within the established timeframes. Employing dollar cost averaging is one of the most reliable strategies, entailing consistent investments of an equal amount of money at regular intervals, regardless of market activity.

Saving money is a challenging task amidst the current market conditions where rising prices of groceries and other commodities are pinching people's pockets. However, according to experts Drak and Lyons, saving money is essential and offers several advantages. Lyons states that with the increasing interest rates, savings accounts and newly issued fixed-income securities are expected to yield higher returns.

Placing money in high-yield savings accounts can help grow it at a faster rate than earlier this year, even though it may still not be sufficient to keep pace with inflation. Nevertheless, it can prove helpful in creating a safety net that can aid during tough times.

Learning from the past, it is vital to prepare for the long haul as higher interest rates and inflation may persevere for an extended period. The 1980s were a decade of inflation, and even several years after two recessions, it was challenging for interest rates to decrease. Although the present situation is different, the past teaches us that similar circumstances are likely in the future.

Drak advises young generations to accept the situation and work hard to earn as much as possible while being frugal. Prudence is the key to financial stability, and it is essential to watch your pennies and pull back wherever necessary.

That's all for today's finance tip. We will be back with more insights on the current financial landscape.

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Hard at Work,

Michael Anthony Francis

The Blind Economist