A report from Guotai Haitong Securities Co., Ltd. (GTHT) notes that during the 1970s, the decoupling of the US dollar from gold led to a global downgrade in confidence towards fiat currency systems. This was followed by significant energy crises, resulting in markedly increased volatility across major asset classes. Presently, the reshaping of the global order is challenging the US dollar's credibility, which had previously benefited from globalization, while recent global energy shocks are also intensifying. The current similarity between the US now and the 1970s lies in the combination of "fiat currency credibility downgrade" and energy shocks: the dollar's share of global reserves is declining, Middle East conflicts are driving up oil prices, and excessive money supply coupled with fiscal expansion creates a risk of inflation becoming unanchored. However, key differences exist: the AI revolution is boosting total factor productivity, shale oil has turned the US into a net exporter, and weakened union coverage and wage indexation clauses mean the rigidity of the "wage-price spiral" is far lower than in the past. The lesson from the Volcker era is that policy must demonstrate resolve to rebuild credibility, but current technological progress creates room for a soft landing, meaning the Federal Reserve does not need to replicate shock therapy. Should dollar credibility continue to deteriorate and inflation become unanchored, some lessons from the 1970s may be relevant. GTHT's main views are as follows.
In the 1970s, the decoupling of the US dollar from gold led to a global downgrade in confidence in paper currency systems, subsequently compounded by energy crisis impacts, which significantly increased price fluctuations for major asset classes. Today, as the global order is being reshaped, the credibility of the US dollar—previously a beneficiary of globalization—faces renewed challenges, alongside increasing global energy shocks. It is necessary to draw lessons from the history of the 1970s.
Linking to Gold: The Establishment and Crisis of Dollar Hegemony. The Bretton Woods system established the US dollar's international dominance through the "dual peg" principle, but it faced the "Triffin dilemma." After World War II, as Western European and Japanese economies recovered, US gold reserves continuously flowed out. In the mid-to-late 1960s, the Vietnam War and the "Great Society" programs led to rising US fiscal deficits and excessive money supply, ultimately making the Bretton Woods system unsustainable. In terms of asset performance, from 1945 to the mid-1960s, US dollar assets featured strong stocks and stable bonds with a firm exchange rate. From the mid-to-late 1960s, as inflation rose and the Federal Reserve tightened policy, real returns on US Treasuries turned negative, US stocks weakened amid volatility, and pressure for dollar depreciation intensified.
Linking to Oil: The Reshaping of Dollar Hegemony and Stagflation. After the collapse of the Bretton Woods system, the US, through agreements like the "petrodollar" deal with Saudi Arabia, tied the dollar to oil transactions, thereby reshaping dollar hegemony. Oil-producing nations acquired dollar surpluses by selling oil, which were then recycled back into purchases of US assets, providing low-cost financing for the US. However, the two oil crises of the 1970s triggered sharp oil price increases, compounded by prior monetary expansion, leading the US into severe stagflation. Asset-wise, gold broke free from official price constraints and rose sharply, while prices of commodities like oil and agricultural products generally increased. The bond market entered a bear phase, with the yield curve inverting several times; US stocks were generally weak, experiencing a prolonged valuation correction, with only the energy and materials sectors showing relative resilience.
Volcker's Inflation Fight: Defending a Strong Dollar. Facing runaway inflation, Paul Volcker, upon becoming Fed Chair in 1979, implemented aggressive tightening policies. By strictly controlling money supply and pushing interest rates to historically high levels, he aimed to break inflation expectations even at the cost of a short-term recession, thereby rebuilding the Fed's credibility and the dollar's strength. Initially, during the tightening phase, bond markets fell deeply, and the yield curve inverted. The dollar strengthened significantly due to high interest rates attracting capital. The stock market first declined then rose: high rates suppressed valuations and corporate profits, pressuring markets. After inflation receded and interest rates fell, recovering profits and expanding valuations combined to initiate a long bull market in US stocks. Commodities and gold fell sharply due to rising carrying costs and a stronger dollar. Ultimately, the bond market entered a multi-decade bull market, and the strong dollar's position was consolidated.
Current US Stagflation Expectations: Similarities and Differences with the 1970s. The current similarity between the US and the 1970s lies in the combination of "fiat currency credibility downgrade" and energy shocks: the dollar's reserve share is declining, Middle East conflicts are elevating oil prices, and monetary expansion alongside fiscal stimulus risks unanchoring inflation. However, key differences are present: the AI revolution enhances total factor productivity, shale oil has made the US a net exporter, and reduced union coverage and wage indexation have made the "wage-price spiral" far less rigid than before. The lesson from Volcker is that policy must show determination to rebuild credibility, but current technological advances provide room for a soft landing, meaning the Fed need not copy shock therapy. Should dollar credibility continue to worsen and inflation become unanchored, some 1970s experiences may offer valuable reference.
Risk warnings include escalation of geopolitical conflicts, increased global stagflation risks, and tighter-than-expected monetary policy.