Submitted by John Aziz of Azizonomics [4],
Why?
[5]
Well, my intuition says one thing — the change in trajectory correlates very precisely with the end of the Bretton Woods system. My intuition says that that event was a seismic shift for wages, for gold, for oil, for trade. The data seems to support that — the end of the Bretton Woods system correlates beautifully to a rise in income inequality [6], a downward shift in total factor productivity [7], a huge upward swing in credit creation [8], the beginning of financialisation [9], the beginning of a new stage in globalisation [10], and a myriad of other things.
Some, including Peter Thiel and James Hamilton, have suggested that there is data to suggest that an oil shock may have been the catalyst that put us into a new trajectory.
Oil prices:
[11]
And that this spike may be related to a fall in oil prices discoveries:
[12]
I certainly think that the drop-off in oil discoveries was a huge psychological factor in the huge oil price spike we saw in 1980. But the reality is that although production did fall, it has recovered:
[13]
The point becomes clearer when we take the dollar out of the equation and just look at oil priced in wages:
[14]
Oil prices in terms of US wages ended up lower than they had been before the oil shock.
What happened in the late 70s and early 80s was a blip caused by the (very real) drop-off in American reserves [15], and the (in my view, psychological — considering that global proven oil reserves continue to rise to the present day [16]) drop-off in global production.
But while oil production recovered and prices fell, wages continued to stagnate. This suggests very strongly to me that the long-term issue was not an oil shock, but the fundamental change in the nature of the global trade system and the nature of money that took place in 1971 when Richard Nixon ended Bretton Woods.