If this is the 1970s, just which year are we in?

The term 'stagflation' has recently come back in to use for the first time since the 1970s and the days of flared trousers, Abba and the 1973 oil price explosion which triggered a massive boom for the Middle East and a period of slow growth and high inflation for the industrialized countries known as 'stagflation'.

It has to be said that the parallel is not that good. GDP growth rates are presently high and have been for several years, although they may be in the process of cooling off. Inflation has recently emerged as a preoccupation of central bankers but is still in the low single digits in industrialized economies and nowhere near the double digits of the late 1970s.

However, if you lay a time-line from the start of the current rise in the oil price in 2000 back to 1970 then perhaps this historical match can be made to work. Even if the matching of years is arbitrary we can make something of the trends that emerge.

Projecting trends

So what happened from 1976 onwards? In short, oil prices continued upwards, inflation rates soared and so did interest rates. Stocks and real estate performed miserably in this period, especially when adjusted for inflation. The US and UK economies performed badly.

From an investment standpoint cash was the best investment in the 1970s, provided it was kept on deposit at the then high interest rates. Gold came into its own very late in the cycle when fear of even higher rates of inflation and a surge in oil prices after the Iranian Revolution in 1979 took prices to an $830 an ounce peak.

In the Middle East the late 1970s were boom times, particularly in places like Dubai with the building of the Jebel Ali Port, at $3 billion in 70's money bigger than any single project in Dubai today. It was only in the early 1980s that the oil price crashed and with it the Middle East boom.

Oil price spike?

Will it be the same story again in the late 2000s? Will some unexpected geo-political event disrupt oil supplies and spike the oil price to a super-high level? It is always possible but forecasting unforeseen events is difficult to say the least and no basis for planning a business.

However, the Arab stock market crashes of the past year may be indicating that some caution would be advisable at this stage in the business cycle. There has been a considerable increase in oil prices which has raised the tempo of business life in the Middle East to a boom, and no boom lasts forever.

Yet if we revisit the 1970s there should be a final headlong spike in the oil price before the end of the boom is in sight, and frankly much more pain in terms of 'stagflation' for industrialized countries with higher inflation and lower growth followed by a recession. But we just don't appear to be there at present.