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Guest Post: Was Stagflation In '79 Really Hyperinflation?
Submitted by Gonzalo Lira
Was Stagflation In '79 Really Hyperinflation?
If my best friend is the truth, then my next best friend is history.
I’ve been writing about the possibility of hyperinflation, if there is ever a run on Treasury bonds. My argument has been, Treasuries are the New & Improved Toxic Assets, a termite-riddled house waiting to collapse. If and when there is a run on them, money will flow to a safe haven, which I am predicting will be commodities. As a byproduct of this sell off in Treasuries and buy up of commodities, consumer prices will rise catastrophically in a hyperinflationary event—and the dollar will be left dead on the highway like roadkill.
This scenario got me thinking about the last time there was a panicked run-up in commodities: The stagflation of the 1970’s in the United States, specifically the period 1979–1983. Oil nearly doubled in price, gold and silver went hyperbolic. Gas shortages were rampant—the situation almost got to the point where the government considered rationing gasoline. In fact, ration cards were printed—that’s how bad things got.
Because of the Oil Shock, the inflation index rose to a peak of 15%—yet unemployment also exploded, reaching almost 11%. This combination of unemployment and inflation was what gave the period its name—stagflation: “Stagnant inflation”.
Thinking about this period, I asked myself a simple question: Could the ‘79 Oil Shock, and subsequent bout of stagflation, be better understood as a period of incipient hyperinflation? And if so, what lessons could it teach us about today?
First, a bit of history:
Starting in late 1977, protests against the regime of the Shah of Iran culminated in his overthrow in January, 1979, and the subsequent disruption of Iranian oil production. From an average of 5.75 million barrels of oil a day, Iranian production dropped catastrophically—at one point to zero—to a new average of about 2.25 million barrels per day.
This event naturally led to oil prices ballooning, from a nominal average of $15 per barrel in 1978, to $25 per barrel in 1979 (data is here). This had a profound impact on inflation throughout the American and world economies.
Up to the overthrow of the Shah, the U.S. inflation index had been at a moderate-to-high plateau. The Consumer Price Index (CPI) averaged 6.5% during all of 1977 and for the first third of 1978.
But in the lead-up to the Revolution and the subsequent overthrow of the Shah, inflation got in high gear: For the rest of 1978, inflation averaged 8.13%, and by March of ‘79—two months after the Iranian oil supply was disrupted—inflation was tracking at over 10% annually. By the end of 1979, average inflation for the year was 11.22%, and by March of 1980, inflation was peaking just shy of 15% (data is here.)
That was also the winter when gold and silver took off in parallel speculative jags that reached all-time highs—that winter was retrospectively the peak of inflation in the United States.
Keep that date in mind: March of 1980. Annualized inflation: 15%.
Though the inflation index was rising, unemployment hardly budged for a full year after the Oil Shock. Unemployment was at 5.9% when the Shah was overthrown in January of ‘79. And during the rest of ‘79—even though oil prices skyrocketed and the attendant inflation swept the economy—U.S. unemployment was more or less steady at or below 6%—
—until 1980: Starting that winter, unemployment bumped up to 6.9%, and it didn't look back. Unemployment would eventually reach a plateau of 10%, and stay at that plateau for a whole year (July 1982 to June 1983), peaking at 10.8% in November of ‘82.
Though unemployment would slowly fall, it wouldn’t be until September of 1987—almost nine years after the start of the crisis—before it reached its pre-Oil Shock level of 5.9% (unemployment data is here).
But during those years—nearly a decade, really—of staggering unemployment, what happened to inflation?
Well, in a word, it got a stake driven through its black heart—but like all scary movies, it was a close call.
Inflation got killed as dead as Dillinger because of the measures taken by Paul Volcker, the Chairman of the Federal Reserve.
As can be seen by the chart, up until Volcker was named Fed Chairman in August of ‘79, Federal Reserve interest rate policy was playing a game of catch-up with inflation—and inflation was winning.
But in October of ‘79, Volcker raised the Fed funds rate to 12% in the so-called “Saturday Night Special”—and then kept on raising them. Volcker kept the Fed funds rate up above 15% for most of 1980 and ‘81, peaking at 19.1%.
That’s right: 19.1%. It shocks the senses to look at that number, and then compare it to the current Fed funds rate of 0.25%.
From the graphic, it’s crystal clear that unemployment jumped up as a result of the first harsh taste of Volcker rates—in January, three months after the first interest rate hit, unemployment jumped to 6.3%, held steady there through the winter, then jumped to 6.9% in April and 7.5% in May. Then it just kept on climbing after that.
Essentially, Volcker induced a severe recession, in order to beat back inflation. There’s really no other way to look at it. Like a doctor administering chemotherapy, Volcker hiked interest rates high enough to kill the cancerous inflation—but he also killed business investment as well, during his reign of double-digit interest rates.
But all’s well that ends well—eventually, when inflation was safely taken care of, the Fed lowered its funds rate: Investment returned, the economy picked up, unemployment went down.
And inflation? It went into remission, after Dr. Paul’s tough medicine. Since the stagflation period and its successful treatment, inflation as measured by the CPI numbers has been basically a non-issue.
Now, let’s double-back to take a closer look at what happened back in 1979, and how it might compare to our situation today in 2010:
(A quick note on terms—by the word “inflation”, I mean two distinct things: One is the macro-economic event whereby prices rise, due to the expansion of both the economy and the credit environment, which bids up the prices of consumables. This sense is used in opposition to the other three macro-economic events, deflation, disinflation, and hyperinflation. The other meaning of the word “inflation”—or what I sometimes call the inflation index or sometimes the CPI number—is simply the actual percentage rise in prices in an economy, regardless of whether the cause is inflationary or hyperinflationary.)
The cause of the rampant inflation of ‘79–‘81 was an oil shock. It wasn’t that the economy was overheating, and consumables (labor and commodities) were being bid up in a growing economy coupled with an expansionary credit environment. Rather, commodities were rising against the dollar—the market was turning on the dollar, and determining that every day, it was worth less vis-à-vis commodities.
What was happening was that, in a very real sense, the dollar was going into a death spiral, when Paul Volcker implemented his psychotically aggressive interest rates.
Note how money supply played no role whatsoever in the inflationary period 1978–1983. Consider the following table:
Increase in the money supply was both inverse to high inflation levels some years (like Jan. ‘75) and inverse to relatively low inflation levels in other years (like Jan. ‘77). But it also tracked high inflation levels other years (Jan. ‘82) as well as low inflation levels in still other years (Jan. ‘86).
Therefore, one cannot make any type of meaningful correlation between money supply and inflation levels, at least not insofar as the period 1974 to 1986.
I would further argue that, if money supply is expanding within mundane historical bounds, then to claim it is either a necessary or (much less) a sufficient condition to affect the inflation index at some indeterminate point in the future is just not accurate.
When inflation was indisputably on the rampage—1980—money supply had increased by a mere 8.34%: The low end of the curve. Yet inflation that year was over 13%—even in the teeth of Volcker’s medicine.
This is significant: Even with those psycho interest rate levels, inflation didn’t instantly roll over and die: Inflation took a long time to draw down—over three years, from peak to trough.
From the March 1980 peak of 14.78% annualized, inflation remained over 14% during that spring of ‘80, before beginning its slow decline. It averaged 13.58% for 1980, and 10.35% in 1981—but in 1982 it was just 6.16%, and by 1983 a mere 3.22% (data as per above).
This decline in the inflation index happened over a 39 month period, even as Volcker kept the Fed funds rate, on average, 464 basis points higher than CPI levels. To repeat: Volcker kept the Fed funds rate 4.64% higher than inflation, and it still took over three years to kill the disease.
During all that time, Volcker was under enormous pressure to ease off on interest rates—the cover of Time magazine pretty much says it all, about the mainstream’s perception of Paul Volcker: An evil Darth Vader-like figure, smoking a glowing red cigar.
Yet Paul Volcker did what had to be done.
Let’s consider a counterfactual: Suppose Volcker had not been the psycho-killer inflation warrior that he was. Suppose he had been timid or slow to act. What would have happened to the dollar?
Easy: The markets in 1980 would have bid up commodities higher even than they did. The Federal Reserve would have continued its ineffective game of catch-up to inflation, as it had done in ‘78 and most of ‘79. Gold and silver would not have shot up in price and then come back down—they would have shot up and stayed up at those exorbitant levels, probably to $1,000 and $100 per ounce, respectively. Oil probably would have crossed the $100 a barrel mark as well. Other commodities and foodstuffs would have followed suit.
All this would have meant that inflation would have continued up, unabated. This is because the only thing that stopped inflation’s moonshot in the spring of 1980 was Paul Volcker’s psycho Fed funds rate.
Had Volcker not applied his medicine, ever-spiraling commodity prices would have sent inflationary tsunamis throughout the U.S. economy—until eventually, there would have been a run on the dollar. If CPI numbers had ever crossed 20% or 25% or some other psychologically important (and so far unknown) number, then it would have been Game Over for the dollar—Zimbabwe/Weimar absurdities would not have been far behind, because there would have been a complete loss of faith in the dollar: After all, a fiat currency is only as strong as the belief it inspires in its holders.
The conclusion is therefore obvious: Paul Volcker prevented hyperinflation from happening in the United States. Had inflation continued rising unabated, the dollar would have collapsed—which would have meant the collapse of the U.S. economy, much as the Soviet Union collapsed in 1991.
If Paul Volcker were a rock star, then I'd be a screaming 15 year-old girl—Tall Paul is my hero. One cannot overstate the political will and strength of character it must have taken for Paul Volcker to resist all the calls to cut interest rates—which were a hysterical clamor, at the time. Had he caved, the Cold War would not have been won, and so our world would be much, much different—for the worse. Those like myself who know this, know how much we owe him—which is why we respect him. As far as I am concerned, he ought to have a white marble statue thirty feet high, placed prominently on the Mall in Washington, D.C., eye to eye with the other great heroes of the Republic. He earned it.
Now, let’s ask ourselves: Was this near-catastrophe Paul Volcker saved us from back in 1979 really a case of incipient hyperinflation?
Many people have been using a throwaway line I wrote as a definition of hyperinflation: “Hyperinflation is the loss of faith in the currency.” If I do say so myself, it’s a nice line—but it’s inaccurate.
Hyperinflation is a severe price distortion, that eventually leads to a loss of faith in the currency. In every hyperinflationary event, CPI numbers rise as the prices of consumer necessities rise. Their prices rise for different reasons—which for this discussion are myriad and irrelevant. But what is relevant is, eventually, such price rises skewer the overall economy.
One of the key distortions that hyperinflation inflicts is price distortions on assets, be they equities, bonds or real-estate. By creating a run-up in consumer prices, hyperinflation imbalances the whole of the economy, making bonds, equities and real assets less valuable. This effect has been observed in every undisputed hyperinflationary episode.
So apart from the severe rise in CPI numbers between ‘79 and ‘82, was there such a hyperinflationary fall in asset prices in the United States?
Yes—without question.
In nominal terms, the New York Stock Exchange was essentially flat—the index was 839 on Jan. 1, 1979, and 875 on Jan. 1, 1982—which means that in inflation adjusted terms, equities fell (nominal data is here). Recall that CPI rose 11.22% in 1979, 13.58% in 1980, and 10.35% in 1981—in other words, 39.39% in those three years.
Average real estate prices, on the other hand, rose nominally though fell in inflation adjusted terms. Average and median home prices in January ‘79 were $67,700 and $60,300 respectively, whereas those same numbers in January of ‘82 were $78,000 and $66,200 (raw data for nominal average price here, and nominal median price here). That represents a 15.2% rise and a 9.8% rise in the average and the median home price. Again, contrasted with a 39.39% rise in CPI during that period, home prices fell during the period of stagflation.
So any way you look at the situation of ‘79 through ’82, it is reasonable to describe it as an incipient hyperinflationary environment. Therefore, the title of our movie ought to be “Stagflation ‘79: Almost Hyperinflation”.
(By the way, this gives lie to the notion common among money supply fetishists that “there aren’t enough dollars in the economy to ever start hyperinflation”—of course there are enough dollars: We saw it in ‘79. Money supply has got nothing to do with hyperinflation. Where there is a shortage or need for a good or commodity, the economy will rebalance itself to meet this new demand. In simple terms, people will somehow always find the cash to purchase their necessities, whatsoever price those necessities might reach. And if the market—for whatever reason—determines that a currency is worth consistently less against the same amount of commodities, then that currency is circling the hyperinflationary drain. The central bank need not inject more money to bring about this end—it can happen without recourse to money printing, or any other central bank or governmental measure.)
Now all of this history is well and good—but how does it apply to the situation we find ourselves in today, in 2010?
Very simple: I have been arguing that Treasury bonds are in a bubble, as they have become the New & Improved Toxic Assets. I have further argued that, at some point in the future, the markets will realize that Treasuries will never be repayed, and if they are, they will be repaid in debased dollars. Therefore, I have argued that when such a realization occurred, the markets would begin exiting Treasuries, and go to commodities as a safe haven.
Contrast this with 1979: At the start of the ’79 Oil Shock, commodity prices rose because dollars were chasing commodities. These dollars weren’t fleeing from Treasury bonds—if they left Treasuries, it was simply as a byproduct of going towards commodities. As more and more dollars went towards commodities, those commodities bid themselves up, creating inflation.
So in a practical sense, the period we are living in now and the period just before the Oil Shock are identical: In both cases, dollars were poised to chase after commodities, following a triggering event. In ‘79, it was the fall of the Shah. In 2010, we are waiting for our moment to exit Treasuries.
Therefore, one can look at the events of ’79–’82 as a dress rehearsal for what I think will happen today, and in the immediate future, if and when the Treasury bond bubble pops:
Like in ‘79, there will be a crisis that will trigger a run on commodities. Like ’79, the inflation index will start to pick up. Like ‘79, this will create hyperinflationary distortions in the American economy, which will be seen at least initially as “stagflation”.
In my previous writings, I had originally thought that, when the moment arrived when markets lost faith in Treasury bonds, commodities would go hyperbolic immediately, or within a very short time frame.
However, studying the events of ‘79 more closely, I realize I was wrong: I now no longer think commodity prices will spike hyperbolically and in a reduced time frame. I now think commodity prices—and CPI numbers—will rise initially at an accelerated clip, say at an annualized rate of 5–6% in the first month.
But here is the tragedy: Increased inflation will not be perceived—at least not at first—as anything to get into a twist over. Each subsequent month will see an inflationary rise at a slightly faster pace, adding a percent or two a month to the annualized rate—but at least at first, not only will this not be perceived as anything worrisome, it will be considered a good thing: Because of the current deflationary recession we are in, any pick up in the inflation index will be interpreted as a pick up in the overall economy.
Eventually, however, as inflation continues to rise but the jobs market doesn’t really improve, the current American economy will wake up and find it has reached the exact same point that was reached back in March of 1980—a 15% annual inflation rate.
But here is the key difference: Ben Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did in ‘79.
Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), and therefore lacks the balls and the backbone to do what needs to be done, Bernanke simply does not have the room to maneuver, insofar as the Fed funds rate is concerned.
If there was a run on Treasuries, Bernanke today cannot raise interest rates to retain Treasury holders—if he did, he would wipe out all the Too Big To Fail banks, and break the Treasury of the U.S. Federal government, both of which depend on the Fed’s cheap money as completely as if it were oxygen.
Back in 1979, Volcker didn’t have this constraint. He could raise rates—but even so, he paid for it with 400 basis points of unemployment.
However, unemployment today is already at 10%, in a soft credit environment. So even if he didn’t have the TBTF banks and the Federal government on the cheap money life support, Bernanke cannot raise rates in order to stop a run on Treasuries, stop a run up on commodities, and stop incipient hyperinflation: The economy is too weak. Adding 400 basis points to the current employment situation—that is, driving U-3 unemployment to 14% or more—would cause political pandemonium, not to mention riots.
Finally, Bernanke won’t raise rates—can’t raise rates—because of a disease of the mind that he has: Due to Alan Greenspan’s pernicious, destructive influence, which I have discussed at some length, Bernanke thoroughly believes that only liquidity injections and cheap money can save the economy—he is looking for inflation. He is so terrified of the American economy circling the deflationary drain, that he is deliberately going in the other direction: He is trying to cause inflation.
Bernanke doesn’t realize that inflation is a symptom that can augur many things. He is convinced that inflation means growth—the opposite of deflation. So all his liquidity windows, all his cash infusions to prop up the Too Big To Fail banks and their bankster operators, QE, QE-lite, the forthcoming QE2—all of it is being carried out by Bernanke so as to cause inflation. He is convinced that inflation will signal that the economy is recovering, and that the Federal Debt will be inflated away, and therefore not break the Federal government finances.
He believes that rising prices will mean that the U.S. economy is about to be saved.
This is why Bernanke is set up to take a hit from hyperinflation: If and when there is a run on Treasuries, and a subsequent run up of commodities, at least initially, the Federal Reserve under Ben Bernanke will not only do nothing, they will encourage this situation. The Fed and its current leadership will interpret this rise in the CPI number as an indication that “We are on the road to recovery!”
We are not: The first hint of commodity prices rising as the Treasury markets begin to fade will be an indication that hyperinflation is on its way. And by the time we get to our March 1980 moment—by the time we get to 15% annualized inflation index—it will be over.
The next stop will be Zimbabwe.
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Yeah, but do you really think it was only the rise in rates that made the difference? I suspect there was a whole lot more going on that that, to include wholesale dumping of Western gold reserves, currency interventions, late night screaming matches as oil execs, and probably some sabre rattling.
Gonzalo, another fine write-up; perhaps in another essay you can delve a little deeper into some of the more critical underlying issues. While you are correct that any interest rate hikes would kill the TBTF banks and increase unemployment to untenable levels, one should ask why these two circumstances exist in the first place.
To answer that question, here's a quick run down of my four principles of pending doom:
Any comparison between 1980 & 2010 will quickly highlight critical differences in the composition of generational age groups, domestic proven reserves, imports and consumption levels, industrialization & regulation, and public/private indebtedness, including funded/unfunded present & future obligations.
If 1980 was only a test-run, at least we had still had effective defenses remaining at our disposal. Today? Not so much. But why is this so? Well, before addressing that question, perhaps a quick recap is in order as to the nature of our world.
As I am quite fond of saying, in order to understand our current predicament we must first place ourselves within the full arc of history to gain proper context. Recall that regardless of era or geography, the one overriding prime directive governing all action is constant & consistent underlying interest bearing loan growth secured by real productive assets. The nominal rate of growth doesn't really matter as long as the real rate of growth is sufficient to accommodate accruing interest obligations.
Ok, where were we? Oh yes, back to us. To wit, we were the beneficiaries of the fossil energy subsidy project (coal->oil) that was used as the primary engine of growth for the last 150 years. But remember, the money lords don't need a rapidly growing economy to succeed, only that overall credit money aggregates are growing. This means the power-elite can still succeed in a post-industrial, post peak resource environment.
Unfortunately for us, however, this option isn't readily available. We are currently so rigidly constructed in such a way, with concomitant overhead linked to promises & obligations we can't possibly keep, as to be almost biologically linked to oil.
What does an employer do when an employee is no longer capable of delivering the goods? Why, they cut them loose. Given the four bullet points above, any rational, dispassionate analysis would conclude that we can no longer deliver the goods in terms of constant, consistent interest bearing loan growth. So we are going to be cut loose. And there ain't a damn thing fed.gov and/or the Fed can do about it.
I'm lost here, what's your point?
B9K9: You hit it. The differences between then and now are huge.
In 1977-1979 US GDP growth was way above now, in fact higher than we've seen over the last decade (4.6%, 5.6%, 3.1%). We don't have that buffer.
There was actual growth back then. That was one component of inflation. We'd be happy to have that kind of growth now.
One can analyze any statement from endless prospectives. The result remains the same, We are up the S/C without a paddle..
A few other differences:
~Half the industrial output as % of GDP
We weren't coming off of a massive housing bubble
We weren't fighting a never-ending war against brown people on the other side of the planet.. for no good reason I might add
Household debt saturation.
Debt equal to GDP and Deficit at about 12%
I could think of more.. but i'm tired..
Indeed... We are at the end of this experiment..
Not to mention...
- More and more women entering the work force to make up for the lost purchasing power of the single income earner: the husband. This had a huge impact. And with out it, the economy and "standard of living" would have never recovered. I quote standard of living because, although households were able to increase their overall purchasing power, it required two incomes, and that's not necessarily a better living standard. Right?
good point.
It required 2 slaves rather then one, big diffrence
It required 2 slaves rather then one, big difference
excellent point
Your writing is cleaned up and gussied a bit but, I think you may be Karl D.
No offense intended.
Im interested, does anyone know roughly how high rates have to go to kill these banks? exactly how much wiggle room do they have?
Would it be safe to summarize your points in one word, that the underlying constant consistent thing is: usury?
Yes, exactly. Gonzalo is correct in his conclusions about the event being incipient hyperinflation, but his myopic fascination only with the Fed discount rate is a major error. Hyperinflation is by definition the loss of faith in a currency. In the case above it was brought on by a complex mix of world events and economic shocks. The real action was a flight from fiat dollars to gold and silver as the only real currency. The interest rates Volcker inflicted on the US Economy were little more than a stopgap measure to try to keep the inflation from spreading. The real action was the pounding down of the price of gold and the continued suppression of the price of gold and silver via criminal manipulation schemes until today.
I would suggest that the hyperinflation which started with the (CIA engineered) fall of the Shah has never really been solved. It has only been forestalled by the suppression of gold and silver at all costs. That game is failing now because there simply is no more physical gold or silver to sell. Soon there will be a scandal when the general public discovers that the LBMA and COMEX have no physical metals at all, and that no gold or silver can be had from the traditional supply chain. Then the price of gold and silver will go up parabolically as desperate investors bid for any chance to convert their useless fiat paper dollars for gold and silver.
All Volcker did was forestall the downfall of the dollar. He was no more effective than Bernanke. Neither gives a darn about anything other than protecting their masters - the major world banks. They would murder their own mothers to save the banks. They will not help us at all except by coincidence. They are not our friends and don't deserve any statues anywhere.
Succinct and accurate.
This is one of the best posts I've read on this site
He's writes well.
Check out his other articles on his blog:
http://gonzalolira.blogspot.com/
Thank you! That's very kind.
GL
Next is the analysis of the current run up in many commodities.
Is it a real supply issue or as you state Gonzalo, money moving away from perceived risk to a safe haven? I believe it is the latter.
Gas was rationed in the NY metro area in '73 and again in '78 by using techniques like odd/even license plate numbers on alternating days and $3.00 maximum purchases. Yes the lines went on forever like the pictures show.
It's money moving away from perceived risk to a safe haven.
And I too lived in NYC during the '78-'81 period, and I remember those lines quite well. They might be coming back.
GL
I agree. I pumped gas during the '78 rationing when I was still in HS. It was non-stop. You ate lunch out at the pumps to keep the line moving.
This time however, the Fed is buying Treasuries on the slack demand to supress rates. Hmmmmm?
Same here on the west coast 73 and 78. The only reason the lines wouldn't return would be that folks might not be able to afford the stuff. Still considering a NG vehicle that I can fill up in the garage though, those lines were that horrendous (and dangerous)
west coast, 1978. The only time (knowingly) my mother let me drive her car without a license. She didn't want to wait for gas. I was picking up my girfriend and cruising the gas lines. Good times - for a kid.
I wonder whether telecommuting would have an impact on gas lines. Personally, if I had to wait an hour for gas I would just work from home.
Which is not to say that other commodities won't to a moon shot - I just wonder if gas lines will be one symptom.
Good article Gonzalo. I was in Germany in 1970 when the silver/gold backed $1.00 certificate bought 4.3 German Marks. In 1972 when I left, the new fiat unbacked US currency bought 2.58 Marks. I came back to America and watched people in fisticuffs for fuel during the shortage. I agree we will see continued commodity price inflation. I also agree the catalyst will be a falling FRN backed bond market. Debt used to buy debt..God help us.. Also, remember that it was Volcker that advised Nixon to close the gold window...
Very indepth, great insights and info.
I've got some that say United States Note and others that say Silver Certificate at the top. George is smiling.
I think you meant:
http://usbta.info/images/stories/zimbabwe_100_trillion_2009_obverse.jpg
Guess I'd better read it. Twice.
I totally concur.
It is fundamental, clear and simple. It is one of those articles that is so well written that even if incorrect furthers the art. One does not even care that it may be wrong because it makes you think. The author even acknowledges previous errors but because he did not buy his strengths with bravado it is easy to cut him slack.
The author writes with a sober dignity and humility.
Also, this writing strikes all those who have a vested interest in supporting particular definitions. That is a very pleasant and important side effect. It is vital to those with large egos to maintain their integrity. As a reader one sees those who purport to be insightful as merely being those who argue that their vision of economic destiny is correct. It is very liberating to see truth become opinion by simply being touched by this text. Please continue, your writings are therapeutic to this community.
Respect.
I agree, he writes with dignity and humility, and makes Mish look like the stinking gerbil infested hamster cage that he is.
Hyperinflation, bitches!
Gonzalo, haven't you been listening to Mish? When the panic sets in investors will sell treasuries and buy.... more treasuries. Otherwise the game is over. Who needs commodities when you can have treasuries bearing slightly more than 0%. Anyone who doesn't see this is obviously a member of the flat earth society. </s>
He has good intentions, but has yet to realize this is deflation in stuff that's a want while inflation in stuff that's a need is a coming. He'll come around in time..
Mish has outlived his usefulness ...
Mish is a child that is so defensive about his positions that he becomes a complete ass at times which takes away from some of his better points. He is rude and arrogant.
I think one of the most important points to remember is that deflation will continue, until it doesn't. In other words, the fed always has the last word because it has the printing press and it can at some point print enough until it wins.
Mish spews and regurgitates posts/news to fatten his adsense
This is why the Internet, and ZH in the particular realm of finance and economics, is king of media. There are so few television shows where a side, any side, is allowed to fully expound an idea. Modern programming allows for lively, although usually one-sided, controlled debate. And while the written/printed word allows for this level of fullness, it does not provide an atmosphere for debate. Three cheers for this great invention.
Which is also why a false flag attempt to confiscate PMs would be blown up in one news cycle.
Great article. I remember my first mortgage was 15% in 1983.
The only thing I would add is when you are correlating inflation with money supply, at the time Milton Friedman said there was an 18 month lag between the increase in money supply and the resulting inflation.
That was then. Check out M1 move in August and recent market run up. The delay is now about 2 weeks from Fed printing to market ramps.
I too had a 14% mortgage, 800gbp per month on 60k.
all these people currently paying that on 250k+ mortgages dont know theyre born.
"Gentleman, you have come sixty days too late. The depression is over." - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
Interesting article, but
Sorry but this is just wrong. You can not imply that the money supply has a direct correlation with prices in the same year. Depending on the conditions of the market the money supply is felt over prices in some way or another. Sometimes it takes longer to act than others. The preference of the people changes.
You are not proving that the money supply had nothing to do. You are just proving that the money supply is not the only key factor. Psicological factors are another key (but not the only one).
Also, I was happy to see that you mention price distortions between different assets. You could have extended more about this issues, since this price distortions play a big role towards hyperinflation. Since the normal market prices are distorted, production becomes less efficient. That means less goods that the consumer want, helping towards rising prices.
I love money-supply fetishits. Their motto seems to be, "Heads I win, tails you lose".
GL
Ooops!! Meant to say "fetishists"!! Must've been one of 'em Freudian Slaps!!
GL
Now who is playing the "Mish game"?
Just so I understand your position correctly, are you suggesting that the increase in the money supply had no influence at all?
If it's within mundane boundaries, then no, money supply doesn't seem to affect inflation levels.
I'm looking at the data—not at any irrational beliefs: In the twelve years that I looked at the data (and cited in my post), there is no correlation between M2 and CPI levels.
However, there IS a most definite correlation between Fed funds rate and inflation—especially when the funds rate is out ahead of inflation levels, like Volcker implemented in 1980 and beyond.
This is what the data says. I'm not making this stuff up.
GL
So, are you saying that correlation implies causation? I hope not. Just because two macroeconomic indicator have some kind of correlation you can not directly imply causation. This is basic stuff.
Similarly, just because you can not find a macroeconomic correlation, it does not imply that there is no relation. Since nobody is able to measure the preference for money of the people through time, you can not find the correlation between prices and money supply, but that does not mean its not related.
I dont understand why you suggest that I have irrational believes, when you are the one implying that correlation implies causation. Hopefully I am understanding this wrong.
Aphorism #3
GL
I dont know what that even is supposed to mean, but do you realize that if you deny relation betwen the money supply and prices you are denying supply and demand? Is supply and demand not a valid economic law for you? You can not have direct empirical correlation between supply and demand, because psicological factors apply as well, but nobody denies it.
EDIT: Anyway, I mostly agree with you, there is just some technical differences. I dont believe hyper-inflation will happen because the USA government is fascist enough to impose all kind of measures, and the USA production and army is still enough to avoid it. I see stagflation coming, not hyper-inflation. But its just a guess, nobody can predict this things with certainty, so we'll see.
Not denying supply and demand, but denying that Fiat Money supply has any sort of relevance.
We live in a world of credit money, that's what affects price changes, and not the M2 nor M3 money stock :
can easily be demonstrated with this graph :
http://research.stlouisfed.org/fred2/graph/?graph_id=29337&category_id=0
1. Total CREDIT growth starts falling first
2. then prices
3. then M2 money stock gets adjusted 6 months later
Which is exactly what is predicted by Basil Moore and the endogenous money theory in contrast to the complete bollocks money multiplier model of the monetarists who still haven't understood that we live in a world dominated by CREDIT money.
Looking at M2 or M3 to predict inflation is like looking in the rearview mirror.
This is the M2 and M3 vs CPI from the 1900 to 2009, tell me if you see some kind of correlation:
http://img94.imageshack.us/img94/7606/cpivsmx.jpg
There is an obvious correlation. And variation on M2 and M3 tend to come before price inflation.
Obviously is not a direct and exact correlation because as I explained before, the preference for cash of the people changes through time. And the graph you posted is misleading because you are posting 4 years of this crisis where there has been a big change of appetite for cash due to the bust of the housing bubble and many and unprecedented monetary interventions. Obviously M2, M3 and CPI are going to be all over the place. Putting this 4 years as representative of something is misleading.
Check the long term trend and you can see there is a clear correlation.
Does this even make any sense? Whether you call money fiat or debt based, the amount of money in circulation matters. Denying it is denying supply and demand.
EXACTLY!
I, too, cannot for the life of me BELIEVE that Friedman and the Chicago monetarists do not seem to understand that our money is CREDIT. I read their work repeatedly and I am like where the hell is the inclusion of compound interest?
There is no such goddamned THING in our system as money supply! It is ALL debt owed to someone plus interest for which the repayment money has not yet been created.
Monetarism is a ship of fools.
What does it matter that the money is backed by gold, or backed by silver, or you consider its debt, or you consider is paper, for the point that the amount of money influences prices?
http://research.stlouisfed.org/fred2/graph/?graph_id=29344&category_id=0
when you have total credit money that's $52 trillion and fiat money that's only $8.7 trillion obviously it's change in CREDIT that is going to influence demand for goods rather than change in fiat money supply.
Simple example : suppose I have 100$ that I don't intend to spend for the next 5 years. You need that money so I accept to lend it to you for the next 5 years. You can go and spend it now and pay me back in 5 years.
Did me granting you that loan change the amount of fiat money in the system ? Nope, still the same.
Did me granting you that loan change demand for goods? Yes, it pulled forward spending that otherwise would have been done later.
That's the effect of leverage : it brings forward demand that would otherwise have come later in the future. Deleveraging has the opoosite effect.
http://research.stlouisfed.org/fred2/graph/?graph_id=29340&category_id=0
As you can see in this graph in 2007 we were adding close to $5 trillion of credit in the system : that affected demand for products and services ten times more than the meager $500 billion of fiat that was added in the system.
In 2009 we substracted close to $1trillion of credit from the system, despite still adding a few hundred billions of fiat. Guess what affected demand?
That's why looking at fiat money supply in today's credit dominated world is useless. Not only is fiat money tiny in relation to credit money, but also credit money gets created first, fiat money later. Just look at credit and you'll know where we are heading for.
Ok. I finally get your point. You see, when you explain things properly they make sense.
What you are saying is that you dont like M2 as a measure of the money supply and you are proposing another one that takes into account more other type of creddit. It seems reasonable.
But my point still holds, whatever you consider money, the amount of money will have influence over prices.
This is usually true, but not always, so be carefull asuming that will be always the case. During this crisis credit went down substantially, but the money supply almost did not went down, so it actually happened the opposite of what you are saying for a little while. Its because of the massive monetization of the goverment debt by the Fed. Obviously this kind of events are rare, and usually happens as you describe. But be careful because its not always the case.
The opposite of exactly what that I was saying?
No the fact that M2 was hardly affected by the credit contraction has nothing to do with the massive Govt monetization but can be very well explained by looking at the following graph :
http://research.stlouisfed.org/fred2/graph/?graph_id=29355&category_id=0
As you can see until the 80s, GDP, Credit and M2 grew more or less at the same rythm.
Then started the credit binge and Credit grew almost 3 times as fast as GDP and M2. Note that during that period GDP and M2 continued to grow more or less as the same rate.
In the future as the credit binge of the past 30 years gets reversed and returns to a sustainable level , that $25 trillions of credit money gets either paid back or liquidated, you will see that M2 will remain almost unaffected, in line with what happened during the last two years.
.
Good point. What GL is implicitly stating is that there is linear correlation. That type of correlation structure may or may not be true.
You are right about lack of linear correlation: It is well known in mathematical statistics that the conditional expectation of the present observation, given the past, is constant and uncorrelated. A GARCH process is an example where the mean is constant and uncorrelated, BUT variance is non-constant and nonlinearly correlated. So, applying a linear correlation statistic to a GARCH process will show no correlation, but clearly this is not true; there IS correlation.
@GL Great post. Enjoy reading your work.
@GL Great post.
@VD Very nice contribution! Paul Wilmott has made great articles about non-linearity eg http://www.institutional-money.com/cms/fileadmin/Uploads/pdf/Vortraege_2009/wilmott.pdf
In my head this makes sense because money supply is only half of that equation- the other is demand aka velocity.
Even though I think we will get hyperinflation or default eventually, I disagree with your analysis, or lack there of.
How can you seriously examine inflation without regards to the elasticity of demand?!
What happened in the 70's is the canonical situation where a serious supply shock coupled with an extremely inelastic demand and the total lack of an immediate substitute cause price to sky rocket. This is why it doesn't need to have much money supply growth to fuel huge price increases. All it takes is enough people who must have gas at any cost.
Of course, if demand does not slacken enough to offset the high prices, the money must come from somewhere. It's ultimately from companies being able to borrow at rates below inflation. It makes economic sense because when they sell the good and services, they can make excess money to pay back the interest. Hence the wage-price spiral feedback cycle.
Volker simply cut off the borrowing by jacking up interest rate above that of inflation, and you know the rest.
You're simply wrong to think Bernanke wants commodity inflation. Quite the contrary! I'd say Bernanke wants commodity deflation! That's why he doesn't give a f*ck about unemployment. What Bernanke wants is ASSET inflation. He said so himself - "I want mother f*cking (asset) price stability, godammit." Asset inflation keeps the defaults away, and banks from dropping like flies.
The current low commodity inflation due to slacken demand relative to supply affords him the luxury of being able to reflate asset prices. This is consistent with him paying interest on the excess reserves. He just wants to shore up the banks, but not to have that money escape into the economy. Well, the money is escaping into the economy via gov't spending. It's just enough to offset the private demand destruction. Hence, no commodity inflation yet.
The real problem is the high gov't debt and deficit spending (I'm assuming private toxic debts will eventually be shifted to the Gov't and the FED). If commodity inflation does happen, either because of a supply shock or if enough of the huge base money gets lent into the economy or if the gov't spends enough of our kids and grand kids' money, Bernanke will find that he simply cannot pull a Volker. Doing so will cause the USG to default in short order.
He'd have no choice but to take up the slack in demand for treasuries. Why slack demand in treasuries? It doesn't have to be a loss of faith in the USD, at least not until later. Demand will slacken simply because everythihg else pays better. Money will flow towards greater return. The more he prints, the better other assets/commodities will be compared to treasuries and the more he need to print. So when Bernanke monetizes the debt, it will just start off a positive feedback which will lead to you know what.
There you go. It's always a fiscal problem. Hyperinflation, or default. End result will be the same. Holders of USD will be f*cked.
No, it will not be like the 70's.
Very good comment.
But there was monetary inflation during the 70's. GL has a table in the article showing that from 74 onward there was arround 10% monetary inflation each year. The government had to pay the deficit of the Vietnam war.
But if people is spending the money in gas they are not spending it in something else, therefore for the gas prices to rise, other prices must go down. But you already answer:
So you are saying that monetary inflation is needed for the general level of prices to rise. Either I understand something wrong or it contradicts your first sentence.
Also, I dont think the oil prices were the detonant of the 70's stagflation. The USA being unable to maintain the $35/gold ounce conversion is what triggered the price scalation. Later on, the USA tryed to play the oil producers to accept their paper but they refused (obviously) and said publicy that they would peg the price of oil in dollars to the price of gold in dollars. Because the USA had been maintaining a false gold ratio for so long (equivalent to suppressing the price of gold), the price of gold went ballistic and so did the petrol prices, sending all the prices up.
It can happen again. Specially because the USA government is fascist enough to stop any type of speculation that would trigger a run on the dollar similar to what GL is talking about, like they did with the silver and the Hunt brothers back then.
I was not claiming there's no money supply increase during inflation. I was making the point that the relationship between price increase and money supply is not only not linear, it highly depends on the elasticity of demand for the commodity.
At one extreme, if demand is absolutely inelastic, then as soon as supply falls below demand levels, price will go to infinitity (in reality, you will see demand destruction long before hitting infinity, via war, eg.). This can happen with or without any increase or decrease in the money supply.
Well said Gonzalo.
Here's the data :
http://research.stlouisfed.org/fred2/graph/?graph_id=29335&category_id=0
Not only is there little correlation between CPI changes and M2 changes, but one can see clearly from this graph that CPI changes happen BEFORE M2 changes.
Look for example at the massive drop in CPI from mid 2008 to mid 2009, it came prior to the drop in M2 changes with about 6 months lead time :
http://research.stlouisfed.org/fred2/graph/?graph_id=29336&category_id=0
(this is the same graph as above but over the 2007-2010 period)
The evidence is there for those who care to look at it, monetarism is as dead as a rock.
Looking at M2 to predict inflation is like driving forward looking into the rearview mirror : crash badaboom guaranteed.
Yes. But how about commodity prices in the 70s vs m2? Your chart shows cpi vs m2 from 1980 to the present. The article was about inflation in the 70s, not after we had 15% interest rates.
There you go:
http://research.stlouisfed.org/fred2/graph/?graph_id=29338&category_id=0
If there's any correlation between commodity prices and M2, it's an inverse one :-)
Thank you, and like any data, its in the interpretation. What I see there is a delay in cpi of about two years to the change in money supply. In other words, the Fed reacts to prices in the economy and it takes about two years to see their changes. I am really starting to see why economist dont all have the same opinion! We just increased the money supply about two years ago, lets see how prices react in the next two years, im betting that commodity prices increase dramatically.
May I add, that interest rates will exacerbate the rise in commodities, this is why I believe it is so hard to draw a correlation when using only two points of data.
Showing just a few years is misleading. This is the M2 and M3 vs CPI from the 1900 to 2009, tell me if you see some kind of correlation:
http://img94.imageshack.us/img94/7606/cpivsmx.jpg
There is an obvious correlation. And variation on M2 and M3 tend to come before price inflation.
Obviously is not a direct and exact correlation because as I explained before, the preference for cash of the people changes through time. And the graph you posted is misleading because you are posting 4 years of this crisis where there has been a big change of appetite for cash due to the bust of the housing bubble and many and unprecedented monetary interventions. Obviously M2, M3 and CPI are going to be all over the place. Putting this 4 years as representative of something is misleading.
Check the long term trend and you can see there is a clear correlation.
I showed these periods because this is the world we live in, a world dominated by credit money, credit derivatives, electronic computer trading...
this is he world we live in (post bretton woods, electronic age, credit derivatives) :
http://research.stlouisfed.org/fred2/graph/?graph_id=29340&category_id=0
This is how things used to look like (bretton woods era, glass steagal) :
http://research.stlouisfed.org/fred2/graph/?graph_id=29341&category_id=0
This divergences have to do a lot with the way the government calculates the CPI.
During the 80's they started adding the hedonic method and other shenerigans that give burocrats the hability of changing the CPI. And as anyone could have expected they have changed it to be lower, so government liabilities grow slower. Its actually another way of stealing money.
If you check my graph you will see that, starting the 80's, the CPI line becomes two lines. One is using the old method and follows the M2 and M3 as it used to, and the other is the government CPI with the new methods, and is reported lower.
+1
And there's also an actual time lag between M2 and M3 "printing" and its effect on CPI (w/o lies since 1980-2).
Please take another look at the M2 & M3 relationship to CPI:
http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png
Falta dos días para el 18!
¡Viva Chile mierda!
Que?
Puede repetir eso in una manera que significa algo?
You are correct. Gonzalo apparently has not read "Secrets of the Temple", which describes the inside workings of the Fed during this very period. During this time, they were experimenting with Milton Friedman's monetarist principles, ie. trying to control the money supply. The money supply fluctuated during this period like a drunken sailor on a pitching deck. Basically, the money supply spigot went from full on to full off from one Fed meeting to another.
When Volcker came in, they went to targeting interest rates rather than money supply, and the rest is history.
I remember in 1978, nearing graduation from college, I bought a new Toyota Celica for $6100.00, loaded (me, and the car!). I wanted a black one, but the dealer said I would have to wait for delivery, and they could not guarantee the price!
Vinz
That's funny! I remember 77' Bob Segar at Renuinon Arena, "Turn The Page". Just plain beautiful! I remember getting pissed when a gallon of gas hit the $1.00 mark. We may have lived through the greatest hyperinflation period already and nobody even told us. Hey that's not fair!
This whole issue needs a lot more work. Included in the source of inflation and was the price of fuel. The Arab states had been getting 5 to 20 cents per barrel for their oil. To forstall a recession as post WWII US dominance in world markets began to wain, the Kennedy administration ellected to remove the silver backing for the currency. Inflation in things like housing cost began. From personal knowledge a new house that sold for ~ $24,000 in 1965 was salable for $45/50,000 in 1969. The Arabs decided they wanted half of the market price for their oil. We all know that gas went from 25 cents/gal to 75 cents.
I have always wondered if reduction in buying power of the dollar during that period had an effect on otherwise friendly arab oil producers.
The Islamic revolution in Iran did not occur until 1978-79. It may have had an effect, even a "final straw" for something like the run on gold but, IMO, the timing was not such that it could be considered a major causal factor.
Inflation was already going on, hot and heavy.
"I remember 77' Bob Segar at Renuinon Arena, "Turn The Page". Just plain beautiful!"
1978 - California (Cal) Jam II. Anyone go? That place rocked. Like 250k people. I think I accidentally took LSD. And I watched a Mexican guy in a Mickey Mouse t-shirt run through the crowd, tearing through ice chests. Anyone remember that? We were probably sitting near each other.
anyone who says he remembers the '70's wasn't really there. ;-)
oh, i definitely remember the 70's and really didn't need to take any drugs to be high.
he remembers + add + she remembers
Out of curiosity, as I haven't read the book, how was the interest rate target implemented?
From what I understand the target rate is implemented via open market operations in order to influence the effective rate, and in this case that would be through the selling of government securities. However, looking at the monetary base in the historical H.3 release doesn't seem to indicate much contraction: there are a few months where it did slightly, but overall the trend is upward -- albeit slower.
Am I missing something, or was that slight contraction contraction / slowed growth sufficient in reducing the supply of cash and influencing interest rates in that manner?
All that is needed is the money supply growth less than inflation. It's the relative rate that matters.
dkny-that's my question, it is an auction after all. Interest rate (target) is set and bonds sold to slurp in money and decrease MZM, M1. Slurp in a lot and you get 30 year bonds at 15% that can not be called.
- Ned
I think the analysis is more complicated. The analysis is the composition of the money supply growth or contraction. Not just the fact that it is growing or contracting, but where.
Everything is "more complicated". At some point one is describing individual molecular action in solid matter. A stopping point must be found in order to gain the attention of the average reader. I'm just glad that he didn't lower the intellectual level to the average.
Exactly right, Ursus Lotor. Turn up the heat and watch everyone argue all day about whether or not Temperature is a quality collective measurement for random motion of individual particles. The terrifying thing about Economics, those individual particles are you, me and the guy next door. Why the rest of us ever allowed a small group of self-annointed elites have a monopoly on the economic metric is beyond me. But then again I'm just another beast that was tagged (SSN) and released back onto the reservation many moons ago.
Thanks, my avuncular friend. It's interesting how many usually affable people will pick a fight over the smallest factoid in an article. What is that? Perhaps a desire to rise above the fray. Contrariness is one thing, anti-social behaviour is another.
Is a bald man holding a gun considered antisocial?
That would be me as well. Balding and armed.
I always liked the Munsters.
I Fester.
"I'm just glad that he didn't lower the intellectual level to the average."
I'm "average" and would leave this site if the contributions were ever dumbed down. Like my son's swimming teacher likes to say, "I prefer to teach at a level just under a quivering lip." This site keeps the average person on his/her toes - fun stuff. Cold and calculating.
oh, the same year now. Any other excuses ?
Why not, I thought he proved it. Not that I needed proof, I have been saying the same thing here for 6 months. Bernanke printed money and bailed out the banks to stop hyperinflation.
+1 there is not an instant cause/effect with money supply. Look at what is happening right now, it took two years and now commodity prices are increasing due to every excuse in the world except an easy over abundance of cheap money.
Well there is a cause/effect, but it's the opposite of what people believe :
http://research.stlouisfed.org/fred2/graph/?graph_id=29337&category_id=0
1. credit money growth drops first
2. then CPI drops
3. finally fiat money growth (M2 orM3) is affected 6 months later
It's Inflation that affects fiat money supply and not the reverse as monetarists believe with their pathetic money multiplier model of fractional reserve banking.
I can see that in the chart, but that is a very biased chart coming into a huge credit contraction period. I still believe the easy and cheap money supply will affect commodity prices greatly in the next year or two. I dont have a chart from the 70s showing commodity prices and m2 do you? I believe there is a time delay, in the 70s, as money supply increased, so did commodity prices and they were not only affected by constricted oil supply. IT is just my opinion and there are so many factors I probably have a better chance with the magic 8 ball in figuring it out.
It's not biased, this is the new reality, the huge credit deflationary environment is the world we live in from now on.
As to commodities prices vs M2 in the 70s:
http://research.stlouisfed.org/fred2/graph/?graph_id=29338&category_id=0
Does it look like increases in M2 caused increases in commodities prices ? Or the reverse? What's the time delay? 3 years? The simple reality is that looking at M2 to predict commodities prices is nonsensical. Even more so today in a credit deflationary environment in the West.
In my opinion, the main problem with seeing cause/effect with "money supply" is that so many only take M2 or M3, or M3 plus credit into account.
"Money" is far more than just M2 or M3 and credit.
The US would not have emerged from that era of strong inflation if it were not for policy moves with respect to energy, particularly, having the Saudis flood the world with oil, and the requirement that the US economy become far more energy efficient by requiring fuel injection in cars.
Volker, and economic policy more broadly, is given way too much credit in the recovery that ensued in the 80s and 90s.
Unfortunately for the US, there isn't a Saudi Arabia with a lot of untapped oil just waiting in the wings. And efficiency gains through technology are far more elusive than they were in the 80s and 90s.
A strong buildout of nuclear power in the 1970s helped when much of it came online in the late 70s/early 80s as well. But there's nothing like that even in the pipeline, nevermind ready to help the US economy. If anything, it is the opposite -- energy infrastructure is decaying far faster than it is being rebuilt.
There is no miracle industry being developed in the US either unlike the 80s and 90s when computer and IT exports showed great promise. Thank the H1-B's and the traitors in government for squandering that industry.
Posible Triggers....
Iran
Korea
cat 4 + hurricane in the Gulf wiping out oil production
PIGS
Germany refusing to pay for PIGS
It doesn't look pretty.
States defaulting leading to bailouts
More MSM reporting on Japan's situation makes me wonder if someone's trying to set it up as a sacrificial lamb, and attention diverter. US still has tremendous natural resources and can largely feed itself. Not sure how Japan is on feeding itself, but the natural resources part is largely a bust.
Good article but GL doesn't mention a key difference between 1979 and now - private debt levels. He does imply this difference when stating that Bernanke cannot raise rates like Volcker, because he is caught in a liquidity trap and would cause a severe debt deflation by doing that.
The government/Fed is helpless to manufacture inflation right now, because there is too much debt and no money velocity. So the only way it happens is the triggering event that GL speaks of, which would probably have to be another major oil shock (runup in wheat prices is not enough). Even then, I'm still not sure the rapid inflation wouldn't burn itself out as unemployment increases and cash flows disappear. A run on treasuries by itself, without expansion of the money supply relative to goods/services, is after all a sovereign default on outstanding debt, which is deflationary.
RDJ, +1
The recession of the "Volker era" was very different than this period because private debt for things like housing was restricted by financial and banking rules that were eliminiated during the Bush I, Clinton and Bush II eras. Local production has been much reduced and that, of course, has greately reduced money velocity and local "wealth".
It seems to me that a run on treasuries would play out in the following way:
to attract more investors interest rates rise, therefore raising the price of servicing that debt. In order to pay for this increase in cost, the printing presses would run on high, causing the dollar to devalue, causing investors to demand higher interest rates, and the process starts again as death spiral ensues quickly.
I have heard this is how it has played out many times before in countries with crusing debt burdens.
Anyone care to comment? GL?
BTW, Bernanke can raise rates to 10%, 20%, 30%, it won't forestall the collapse, and might even accelerate it, due to the weight of the national debt.
The only monetary policy that might get the economy working again is to directly give cash to engineers and producers. If the Fed were to print up $10M for each licensed P.E./P.Eng. to invest -- maybe it would go somewhere useful. But giving money to those Wall Street retards is most certainly a path to complete ruin (and the engineers will ultimately get the last laugh as the dust settles!).
Your analogy is full of holes, as far as I'm concerned. No mention of credit and how it relates to the current situation. In '79 what was the household-to-GDP debt ratio vs. today?
We just had oil at $147 / barrel and it damn near crippled the freight companies. I think in a few years you will look back and realize that we already saw speculation and hyperinflation in real estate 3-4 years ago, oil 2 years ago, and gold today. What you're saying is happening - NOW. If treasuries pop, then it will be more apocalyptic than hyperinflationary.
Gonzalo Lira
You went through real hyperinflation in Chile (I believe I read). I had a chance to see (as an investor in our business there) real hyperinflation in Peru (their largest banknote was 5,000,000 Intis). And I was here in the USA in those unfortunate years 1979 - 1982.
The two (stagflation here around 1980, hyperinflation in Peru) felt very different to me.
First of all, a subjective feeling doesn't help: Please be more specific as to what difference you find, and why you find these differences noteworthy.
Second, Peruvian hyper-i and stagflation in America in '79 are obviously different. I do not know the details of the Peruvian situation—though I assume it had to do with governmental money printing. Whereas the stagflation/incipient hyperinflation in the US had more to do with imbalances in the internal economy, not irresponsible money printing by the government (the reason I brought up money supply, to lay that ghost to rest).
In my post here, I'm comparing apples and apples—USA in '79 and USA today. I cannot give an intelligent assessment of the Peruvian situation, and how it applies to the US. SORRY!
GL
GL, you are not necessarily comparing apples to apples because you are dismissing the importance of private debt-GDP ratios. You are also assuming we had "incipient hyperinflation" in 1979, and since the money supply didn't increase much you say that condition is not necessary for hyperinflation. Circular logic.
Also, your argument attempts to treat an oil shock as the equivalent of a runup in any hard commodity. This is probably a mistaken comparison because oil is THE foundation of our entire industrial economy, and is used to produce almost all other goods. So I'm not surprised lack of access to cheap oil would cause severe inflation in consumer prices.
Right now, we are not at the point of an oil shock... YET. It will happen though due to peak oil production, most likely within the next ten years. However, the lack of access to oil itself would be the cause of hyperinflation, not a collapse of the American bond bubble. Right now it's not entirely clear that a selloff of treasuries would mean people dumping all of their dollars for "hard" assets.
Incipient — Synonyms:
beginning, nascent, developing.
I believe GL's point is that the cause of hyper-i is not excess money supply but structural distortions (ie. malinvestment). Eventually the distortion is revealed (discovered) followed by volatility in relative prices, which further distort future business projections, etc. Suddenly no one can move, because no one's sure about relative prices in the near future. Faith in each other is lost, the exchange of goods and services slow, and fiat savings look for something stable (necessities, commodities).
A common trap is to view the lower business activity (and ignore higher commodity prices) as a lack of liquidity. Had Volker fallen for this and increased the money supply, hyper-i could have continued, increased. The oil-shock of the 70's might have been the blow to the system that revealed the structural distortion not the cause. Hyper-i then "began" and was snuffed out by the Volker high Fed Funds Rate.
However, "oil is THE foundation of our entire industrial economy, and is used to produce almost all other goods" is a salient point and must be taken into account upon analysis. Energy, lube, tires, asphalt, plastics, etc...certainly has an effect not only on the goods and services directly but also on the "roundaboutness" of the supply chain in general.
"Also, your argument attempts to treat an oil shock as the equivalent of a runup in any hard commodity." Try pricing oil in gold, you might find it interesting. Very stable at 8 oz / barrel until late 1960's, then volatile afterward. Should GL's commentary be true, it is likely that the $ going full fiat in 1971 (1968 unofficially) was the structural distortion cause of 1979 and is still the structural distortion of today.
I understand that excess money supply is not necessary for hyper-inflation, but it could be sufficient. Except the malinvestment we've had over the last 30 or so years is that of speculative credit invested in unproductive assets, which is a recipe for deflation as long as the debt obligations persist. That is a significant difference from the 1979 episode. The reason Volcker could get away with raising rates was that the economy wasn't saturated with debt.
If he hadn't raised rates, its unclear whether there would have been hyperinflation or it would have ended up burning out. I also think comparing an economy facing an oil shock to one facing a fearful flight into "safe haven" commodities is bit of a stretch when talking about a triggering event for hyperinflation.
"Except the malinvestment we've had over the last 30 or so years is that of speculative credit invested in unproductive assets, which is a recipe for deflation as long as the debt obligations persist." Minor difference of opinion for me: deflation for some "assets" relative to others.
"The reason Volcker could get away with raising rates was that the economy wasn't saturated with debt." This is true. I might add that jacking up the rates saved the fiat instrument ($) before, but this is not the plan today IMHO.
"I also think comparing an economy facing an oil shock to one facing a fearful flight into "safe haven" commodities is bit of a stretch when talking about a triggering event for hyperinflation." There are differences b/t '79 and today as you have pointed out, but there is one very big similarity. An oil shock was/is followed by runaway commodity prices. When oil went from $35 to $147, that was our signal to go long commodities.
Uncle Fester's pretty much got it.
However, to be clear: I am not against fiat currency per se. I am against mishandled, mismanaged fiat currency—as we saw in '71–'79, and most especially as we have seen from '87 through to today.
Greenspan especially will be regarded as an evil, evil man. See my takedown of him here: http://gonzalolira.blogspot.com/2010/09/prosecutions-case-against-alan.h...
GL
GL-
Some food for thought. Absolute power corrupts absolutely...or something like that.
Fiat currencies end up being mismanaged every time. Manipulate currency and you manipulate supply / demand. Manipulate currency whilst holding supply constant via cartel and you manipulate demand. Manipulate aggregate demand and you socially engineer en mass. The global manipulators do not care about fiat, they care about control. Controlling you, me , our children and grandchildren. Fiat is the vehicle to accomplish this. Knowing this, shouldn't we be against it?
This is what I heard too. The re-pricing of oil in dollars, was a simple re- alignment from the Nixon inspired full fiat dollars circulated from a near decade earlier. The Arabs were looking for a political window - and so the Arab -Isreal conflict saw to it the dark princes of the gulf getting a closer true market price for their barrels. They don't call it black gold for nothing,,, and if they really did give a shit about their brothers why didn't they just turn off the taps? This wasn't a shock as such, more like how shocking the Arabs didn't wake up earlier to the fact they were getting robbed.
GL,
OK, I appreciate that my fuzzy language may not have been helpful, but you are right that it was Peruvian .gov typical overspending and money printing that led to their problem.
And I appreciate that you are indeed trying to compare "apples to apples" here in the USA.
No harm, no foul. Peace, Love, Woodstock.
"Peace, Love, Woodstock."
That's my line.
'S'aright, DoChen.
However, you DO seem to have a genuine concern with my analysis. Try to articulate it clearly, and I will do my best to answer it with equal clarity. Fair enough?
Peace, Love, Armageddon.
GL
GL,
Thanks very much for your post and ongoing comment. We need all the help we can get.
HB
DoChen that 1979 was indeed an unfortunate year. jeeze and it wasn't about inflation.
A Bad Year (a haiku by the Bearing)
Roid, warts, busted disc
Well, what could the problem be?
Two Thousand and Three!
not bad. i said unfortunate, like you said unfortunate.
your weird.
Could the catalyst this time be the inevitable war with Iran?
I know this Nadlers(who will drive one to drink) site, but this is from Jim Willie, as usual excellent read, and stats, and goes right along w/G Lira's post.
http://www.kitco.com/ind/willie/sep162010.html
Jim Willie CB (what is that CB business anyway?) is about the Biggest Bear now growelling in the woods. I try to read him each week.
I want to run a poll on a live thread...ask you guys if you'd do this..
If the GOV would have offered 50 cent on the dollar lump sum payouts to all Americans who had paid in to SS rather than bailout the greedy fucking TBTF and FED cartel...
Thereby reducing future liabilities, putting money where it belongs into the hands of taxpayers and homebuyers, and putting TBTF all of them into receivership...would you have opted for this?
If they had let the TBTF( a real jerk off deal, not needed), then we would not be where we're at now).But, then that's not their plan.
People still (a lot do here), do not get this as an Orchestrated take down, everything that's been done is for dismantling the Global Western System.
New World Order......prelude to the Antichrist.
The 1st Stimulus Pkg was enough to stop the fiasco.
All after that, were simply more theft.
50%?.Right now yeah.
Then, no way, 75%, yeah..........gotta look at the loss in interest over a lifetime time value of my coins.
only if ALL unfunded liabilities participate. until then force it until it breaks.
when the pers union fears that they may get aslittle as the ss folks we will be near.
never happen
only if ALL unfunded liabilities participate. until then force it until it breaks.
when the pers union fears that they may get aslittle as the ss folks we will be near.
never happen
It would have to be discounted to current value based on current treasury rates, date of commencement and life expectancy... If they're going to do that they'd better hurry up with QEII, QEIII and QEIV before anyone gets wind of it....
I would definitely take fifty cents on the dollar today...
Not 50 cents on the dollar, however, I would want dollar for dollar but would be very reasonable about the cap rate that we used in the equation. Say for example 4% v. 10%. I would definetly take a lump sum in this case for my past contributions to social security.
Nice post, very much enjoy reading your work.
Thank you!
GL
The dollar is here to stay, got it yet?
What happened when Saddam wanted to trade oil in Euros?
If anyone ever attempted to sell the dollar in a major way, the US would simply stick a gun down their throat and threaten to blow. If that didn't work, the we'd just invade and occupy the crap out of them.
Got it?
No Great Depression 2.0! It's not coming folks! I am seirous here
There are simply no more bubbles! Treasuries are literally a risk free invesment.
Bernanke knows the risks. He is acting like a saint and helping to save America from Economic ruin. Got it?
True words of Diocletian, until his own people turned on the state!
Good luck!
Yeah. I got it. Now go away.
I just dumped a load of paper for silver, and I will do it again next payday, and again, and again, until the NWO is dead. Got it? Come stick a gun down my throat. I'd like to see you try that on me and the billions of other people who will soon be dumping the NWO's money. You can stomp a few army ants but you can't stomp us all.
Got it?
Great argument! You really have to admire people who argue without data or other supporting real evidence; it makes your point so much stronger.
Your coloring book and crayons are in the lobby--------------------------------------------------------------------------------------------->
Try to stay within the lines....
"You really have to admire people who argue without data or other supporting real evidence;..."
He doesn't need any data, he's got inflection and tonality.
It's not possible to tell from your incisive analysis whether you are a shill or just dumber than a doorpost ... so I junked you anyway.
Are you Phil Gramm in disguise?
Bhahahahahahahahahahahahahahahahahahahahahahahahahahahaha...
<Breath>Bwahahahahahahahahahahahahahahahahahahahahahhahahaha!!!!!
<Breath>BWAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!!!
Oh boy that was funny, you got any more like that? :)
A quick question. How many people can pay a million dollars for a can of coke and a billion dollars for their latte at starbucks. Seriously, this is just all a joke. The hyperinflation you speak of is total collapse. All currencies are backed by the dollar and when the dollar fails, the world fails. Welcome the chaos. Go buy bullets, bullion, and build that bunker. War, civil unrest, and armageddon is on the way.
yep. it's not coming.
Get ready for Peter Schiff and Ron Paul were wrong 2012 verison. I would really hate to be a Europac client.
No, it is coming... Eventually. There won't be any YouTube video, because YouTube won't be around, heck there won't be an internet.
DOOM
No one,unless you GOT PM's, and then you will when very few could.
As I said yesterday, being the Reserve Currency, means nothing to the PTB, if they want the Yuan as the Reserve Currency, then they can do it in 60 Seconds.
All currencies are backed by their own Gv'ts............not the dollar.
It's like you get too old to be productive, die bitch..........your a useless eater.
No good to the collective.
If Armageddon is around the corner, and it's close, it is of no consequence to me, I will be gone before it starts.
I have said it before and I will say it again.
"Higher prices" alone do not constitute hyperinflation.
Hyperinflation is a terminal symptom of socio-political, economic and currency failure.
Even in a worst-case scenario we (the US) are at least 5-10 years away from being in such a state.