Welcome to the 1970s of Tech
When paradigms mature, stagflation follows
It looks like we're entering a new age of stagflation—that toxic combination of stagnant economic growth, high unemployment, and persistent inflation that shattered economic theory in the 1970s.
But the current episode isn't the crisis you remember from history books.
The 1970s version was driven by oil shocks and wage-price spirals that Fed Chair Paul Volcker eventually crushed with 20% interest rates. Today's emerging crisis may have a different engine: artificial intelligence's explosive electricity demand hitting a grid that can't expand fast enough, likely creating the first energy-driven inflation since OPEC's heyday. Alas, unlike the 1970s, we can't simply raise rates to solve it. The Fed's tools are broken, wages won't rise to cushion the blow, and the very technologies meant to boost productivity are instead becoming inflationary.
Training next-generation AI models will require orders of magnitude more electricity than current systems. Data centers are already straining grids nationwide, with their consumption set to triple in coming years. Electricity prices are surging at multiples of general inflation. Yet this is just one element in a perfect storm: software shifting from predictable monthly fees to volatile usage-based pricing, Trump's tariffs and deportations crushing supply while raising costs, structural food shortages as ranching becomes unprofitable, ballooning federal debt that makes rate hikes self-defeating, the executive branch messing up with official statistics, and the steady erosion of Fed independence.
As I argued in my late-cycle investment theory, we've reached the maturity phase of the age of computing and networks—our equivalent of the 1970s in the age of oil, automobiles, and mass production. And just as that decade saw massive investment yield diminishing returns, today AI spending drives half of US growth while delivering almost no measurable productivity gains. Western nations pour billions into data centres that consume ever more electricity, even as China uses the same AI tools to enhance its manufacturing dominance.
This feels like stagflation at the end of the age of computing and networks: a looming crisis where technological progress itself becomes inflationary, and where none of the old remedies—not rate hikes, not fiscal stimulus, not even technological innovation—can provide relief. Read on 👇
1/ The stagflation tremor is growing
Jared Bernstein and Ryan Cummings in the New York Times:
Whether it’s historically high tariffs that never quite seem to stabilise, deportations that threaten to seriously disrupt labor supply in sectors like construction and health services, or a reverse-Robin Hood, budget-busting bill that takes money away from those most likely to spend it, Mr. Trump’s policies have pushed economic uncertainty to levels last seen during the onset of the pandemic. This uncertainty has damped investment, hiring and consumption, while the tariffs increase prices. In other words: stagflation.
Joe Weisenthal of Odd Lots (the Bloomberg podcast):
[These days make] it easy to envision what a stagflationary environment looks like: an economy that exhibits mediocre growth across many sectors, but which sustains a fairly high level of resource utilisation, because there’s so much demand for social assistance (soaking up labor) and demand for electricity and certain types of industrial gear (soaking up capital) due to the AI buildout.
Paul Krugman on his Substack:
When Donald Trump announced his Liberation Day tariffs on April 2, many economists declared that the economy was headed for stagflation, with a number outright predicting recession. Looking back over my own posts, I was a bit more cautious. Specifically, I had and have no doubts about the flation aspect, but was less sure about the stag. At this point, however, the data really are looking increasingly stagflationary. And I thought it might be useful to talk about why the lights on the economic dashboard are flashing yellow or red.
To be fair, this is not unprecedented, and past predictions have turned wrong. In 2022, Janet Yellen, Biden's Treasury Secretary, warned:
The economic outlook globally is challenging and uncertain, and higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world.
In the end, inflation was (unexpectedly) tamed, growth resumed, and Biden left office with a booming and relatively healthy US economy.
This time, however, may be different. Trump's policies, the tariffs, the AI boom, the potential erosion of the Fed's independence, and other factors all increase risk. These conditions—policy uncertainty, resource constraints, and technological disruption—mirror the structural forces that created the 1970s stagflation.
Thus a return to stagflation would not be surprising. My late-cycle investment theory suggests we are living through the 1970s of the computing and networks era, with our current techno-economic paradigm reaching maturity and shaping macroeconomic outcomes and capital allocation. From this perspective, stagflation—a defining feature of the 1970s—could make a comeback.
Let us examine whether stagflation is indeed likely and what it would mean for the economy.
2/ Stagflation once shook the 1970s
The 1970s stagflation combined persistent inflation with high unemployment in ways that defied conventional economic theory. Inflation peaked at approximately 14% in 1980, while unemployment rose from 3.5% in 1969 to nearly 11% by 1982—a devastating combination that destroyed household purchasing power while eliminating jobs.
As Paul Krugman recently explained in a stagflation primer, it emerged when firms engaged in “leapfrog” pricing—raising prices not just to cover current costs but to stay ahead of expected future inflation. This created a self-reinforcing cycle in which inflation became “entrenched” in expectations, while slowing productivity and stagnating demand devastated the job market.
The cure was famously brutal. President Jimmy Carter, a Democrat who took office in 1977, appointed inflation hawk Paul Volcker as Chair of the Federal Reserve, which reassured markets. Under Volcker's direction, the Fed drove interest rates to punishing levels—the federal funds rate peaked at 20% in June 1981—pushing unemployment from 6% to nearly 11% and contributing to Carter's decisive loss to Ronald Reagan in 1980. Krugman notes it took six years for inflation to fall to the Fed's then-4% target, with unemployment remaining elevated throughout. The harsh medicine worked because it broke the cycle of inflationary expectations—companies stopped raising prices when faced with collapsing demand.
The Volcker shock then ushered in the “great moderation”—decades in which central banks successfully anchored inflation expectations around 2%. This stability enabled the financialisation of the 1980s and the globalisation of the 1990s, both dependent on predictable monetary conditions.
Understanding the 1970s experience is critical today. If stagflation re-emerges, policymakers face a stark trade-off: aggressive measures to tame inflation can sharply raise unemployment, while tolerating inflation for the sake of employment risks letting inflation expectations become entrenched, potentially creating a prolonged economic malaise.
3/ Structural forces drove the 1970s stagflation more than oil shocks
The stagflation of the 1970s offers lessons for understanding current risks. While the Volcker-era cure is well documented, the structural forces that made stagflation possible are often overlooked.
Krugman's framing is fairly standard: once inflation settles, it feeds on expectations—firms expect higher costs, so they raise prices; workers then expect higher prices, so they demand higher wages; costs rise further, and firms raise prices again. If this cycle does not translate into higher demand and instead freezes investment, inflation can coexist with rising unemployment.
The conventional story also emphasises two oil shocks. In 1973, the Yom Kippur War disrupted supply from the Middle East, quadrupling oil prices from $3 to $12 per barrel. In 1979, the Iranian revolution toppled the Shah, destabilising a major OPEC producer and pushing prices from $14 to $35 per barrel. Both shocks sent crude prices soaring, sharply raising household and business costs, and contributing to inflation while suppressing growth and increasing unemployment.
Carlota Perez offers a complementary view that shifts the focus to structural factors. In an email she sent to me in 2018, she highlighted three key dynamics:
Unemployment reflected the maturity of the existing paradigm. By the late 1960s, the age of oil, automobiles, and mass production had largely exhausted its productivity gains. Markets in rich countries were saturated—most households already had cars, fridges, and washing machines. Wage growth without corresponding productivity gains became unsustainable. The post-war boom had to end, but it took a few years for many to realise it.
Western production lagged even as global demand grew. Instead of positioning to serve this emerging global demand, Western economies started moving production offshore, encouraged import substitution in Latin America, and supported the development of export processing zones in Asia. They also leveraged new technologies—standardised shipping containers and IT—to coordinate global production efficiently, taking advantage of lower costs abroad rather than expanding domestic production.
In this context of massive structural changes, the oil shocks were opportunistic rather than purely supply-driven. OPEC aimed to secure larger profits from their exhaustible resource, recognising their newfound pricing power. Meanwhile, Western oil companies sought asset-light models, focusing on services rather than extraction. Traders like Marc Rich played a crucial role, establishing trading networks that arbitraged global oil markets, creating liquidity and new price discovery mechanisms that amplified price volatility. This reshaped the oil value chain and magnified the economic impact of energy price spikes. What might have been manageable supply disruptions became economy-wide shocks because the new financial infrastructure could transmit price signals instantly across markets.
Carlota’s perspective does not deny that oil shocks contributed to inflation. But stagflation was already building by 1973 due to structural, technological, and global shifts. The underlying inflationary environment provided convenient cover for oil producers and traders to push through dramatic price increases that markets might otherwise have resisted. Inflation, once set in motion, tends to propagate: participants either follow it because they must or, as was the case with the oil industry, they exploit it to raise prices that would otherwise not be accepted by the market.