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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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Inflation got killed as dead as Dillinger because of the measures taken by Paul Volcker, the Chairman of the Federal Reserve.
Anybody who can write this has no idea what he's talking about. If you take the (understated) official CPI rates during the Volcker years, 1980-87, per
http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
you will find 5.8% average inflation.
How does an annual inflation rate of 8.4% in January 1982, deep into the second recession in a short time, grab you, Mr. Lira? Is this an example of killing inflation as dead as Dillinger?
No, there was no hyperinflation back then, but there was chronic inflation. And there actually was a bit of a booming economy from time to time (cyclical) for demographic and other reasons.
Finally, nowadays, the Fed needn't monetize the debt. Gentle Ben doesn't need to, and is wrong to, impose below-market interest rates. Remember that for every borrower there is a lender. So if rates were high, a la Volcker, savers would receive income. If borrowers become insolvent by paying higher (market) rates, that would be good. Get rid of the deadwood. Beats chronic anemia/zombified economy.
Uncle Ben Sholom does not have to print 1 more dollar for inflation to rush onshore in all its glory. We just need a global dump of dollars and assets in mass. Already enough "cash/dollars/debt/credit" in the system.
There you have it in a nutshell. The repatriation of dollars will make the pallets we shipped to Iraq look like pocket change.
http://www.michaelvincent.net/wp-content/uploads/2010/07/Billion_Pic_1.jpg
http://infinonymous.blogspot.com/2010/05/one-trillion-dollars-down-drain...
http://www.huffingtonpost.com/paige-donner/the-pentagons-fifteen-bil_b_1...
"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
Spalding,
Yeah, "And all we have Fear, is Fear itself!".
Never a truer word spoken by a more corrupt Progressive.
As he proceeded to DO the same damned things Bernicky is doing.
And more.
"The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters."
"All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
Chairman Ben S. Bernanke
At the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois May 17, 2007DosZap, if you lived back in the 1930's you wouldn't have been debating the New Deal in the US - you would have been marching with the Brown Shirts in München.
Ironically, the Nazi scumbags ended up as tools of the "progressive" capitalists you claim to hate so much. They died fighting the USSR so the good 'ole USA could conveniently roll in and save the day - securing the legacy of Keynes and FDR.
Who do you think facilitated financial services, built the tanks, and kept the trains running on time in Nazi Germany? The same institutions that served the "arsenal of democracy" -- Ford, GM, ITT, Chase, JP Morgan, ITT, IBM, etc etc. They wanted to keep all markets out of Russian hands because they didn't want to play with the capitalists - these businesses shared the same geopolitical goals as Western governments since the Bolsheviks took over Russia in 1917. While the Anti-New Deal crowd, the Nazis, and their supporters were rallying the crowd with anti-progressive slogans - they were actually in bed with FDR and Keynes.
Why do you think FDR didn't try to stop JF Dulles from colluding with IG Farben, even as they were murdering millions of people? Why do you think Keynes defended the BIS even after it was clear they were laundering plundered Nazi Gold? Because they were on the same side. Their side. You would have just been a dumbshit Brown Shirt - because all you see is the rhetoric, not the actions.
Ahhhhhhh....
Prescott Sheldon Bush' comes to mind reading your missive.
... "if your not inside you are outside, ok"
envious?
By the way, Prescott Bush was a minor player - he just happens to have famous offspring.
I agree with your prior post 100% ...
I tossed out the boob tube long ago maniac research is the game of choice ...
I appreciate that, Spalding. Sorry to be spikey with you - you're alright.
AND NOW!!!!! for some really funny shit!
http://www.youtube.com/watch?v=YuBUIDLmKfk&feature=sub
If this doesn't make you laugh, then you need to turn up your drip.
laugh, that man is repulsive to look at. he is the devil in street clothes. laugh†
I turned up my drip, and I still didn't find it funny! Same old everyday pablum.
You must be just laughing all the time. Laugh on, sailor, laugh on!
love reading your articles Gonzalo
I think it has great value to listen to someone whom had
lived in a country wich has expierinced hyper inflation.
It gives me a lot of insight on how to prepare for future events.
.
According to Obama if you make over $250K you are a billionaire
Could you please post your source on this astonishing revelation?
Thank you in advance for your reply.
au-Cas has a message for you. Something about six months at "summer camp" to get your mind right. Self-criticism is high on the list. Enjoy slopping the pigs.
- Ned
There was one quarter in the late '70's where the fed govt actually ran a surplus! Oops overshot the printing a bit.
Volcker? A hero? This is a puppet show, remember? He was no different than any of the other shtadlans, i.e. Reb Alan Greedscum, Reb Shalom Bernookystein, etc.
Volcker, just another carnival puppet that ended up at J. Rothschild, Wolfensohn & Co. in NY, the hofjuden master's house. When any of these shtadlans speaks, what you hear are the words of their hofjuden puppeteer. Anyway, whose hand was up his ass, that's what I want to know.
I call bullshit on this Volcker 'hero' thing too.
Everything in credit from Treasuries to Commercial Paper expanded through the late 1970's & only accelerated into the 1980's.
Volcker didn't crush 'inflation' at all, he perpetuated the $ bubble, that's what he did.
While we're all calling bullshit - I'd like to take this opportunity to call bullshit on the wannabe Nazi clowns. You know...like you, Pseudo. Does it bother you to feel misrepresented? Don't like the unfair blanket statement?
I can see the defence now: "Aw, gee! I only use racist screeds when I talk about individuals I hate! ..the rest of you Jews (you know, the regular ones that don't secretly control the world) are just fine! I swear!"
Keep your damned anti-Semitism to yourself...don't you have something better to do than spew your bullshit? Like maybe sniff glue or something?
Oh look. Maniac is playing community watchdog. Fuck off. I miss Marla.
And thank God B9K9 still has the fortitude to post his insight with the likes of Plad "the vagina" trying to be a little helper.
B9K9 is full of shit ... 50% of his thesis is built upon sand & salt.
Hey spalding. The way I see it B9K9 is a straight shooter. If you have an issue why don't you lay it out instead of a hit and run down at the bottom of the rung.
I have blown holes in his post in the past, will do it again in the future ..
He may be a straight shooter but to claim being at the right hand/we should be blessed to get insight from the elite,please... then spilling out what ifs from new mexico to eastern europe and beyond. His rants on geopolitics hold almost no water ...
I'm not up for being anything aproximating a watchdog here - and for the record, I miss Marla, too. This blog did not used to be as filled with all manners of nasty screed the way it is now. Mostly I try to ignore it; however I'm inclined to speak up if I see something that bothers me just the way you do, Waterwings.
"Mostly I try to ignore it; however I'm inclined to speak up if I see something that bothers me just the way you do, Waterwings."
Speak up, please do.
only a retard, such as yourself, could think that jews control the world. They never have and never will, pal. Hofjuden and their shtadlans always were, are and will be convenient scapegoats that will be disposed of once they are of no use to the aristocracy that is using them to reclaim all they lost during the renaissance era. One day we'll wake-up and the NWO will be the same as the old, pre-renaissance order when monarchy ruled its plebs. Will you ever get over the fact that you Jews do not control the world? Secretly or otherwise? That's what I want to know.
..."We shall unleash the Nihilists and the atheists, and we shall provoke a formidable social cataclysm which in all its horror will show clearly to the nations the effect of absolute atheism"...
"Will you ever get over the fact that you Jews do not control the world?"
Unless this statement is meant to be a joke, you would be the minority here. Most Jew bashers on this site believe we do control the world. Props to you for seeing the truth about "ownership."
VI. What ever you say Boss. So the jews in power now are merely tools, much like the Fed, to be cast aside once the pillaging is done? I thought jews were smart? People are different. The few jews i have known had much heart and were indeed smarter.
It is odd to me that so many in the halls of power are jews. Thats just a fact odd tho it may be. If the country is run well perhaps noone would care.
Since our country is being pillaged and the LAW is no longer allowed while led by same jews i do have a problem with that as it pertains to leadership.
I dont care what or who you are in the street. But in the halls of power i expect justice and honesty that is not present today
think of USofA as a ghetto. Kehilla I should say. This kehilla is currently run by the Fed with a shtadlan in charge. The shtadlan reports to hofjuden. Even though it has been like that for at least the last 400 years, can you figure out who are hofjuden working for? That's what I want to know.
@merehuman
I know your position, we have discussed it before. I am merely pointing out that this statement totally contradicts the norm. Rest easy, buddy.
no, it wasn't a joke. that's the reality. It's retards, such as Maniac, within your ranks that pull the anti-jew shit which prevents the rest to see that jews are being used, as they always been and will be. When the end-game comes, the plebs will turn on the jews. The plebs are already waking up to it. That's by design. The aristocracy may or may not pillory their hofjuden. It is up to you, jews, to put the blame where it belongs instead of protecting them. At the end, the shtadlans and hofjuden will throw you jews under the bus and line up with the aristocracy, as always in the past. But, when are you jews going to wise up to this, that's what I want to know.
Your thinking is flawed on the account that you believe whole groups of people think the same thing. They don't. This makes you look dangerously naive.
History will appear as a neat little continuum to people (like you) with such simplistic worldviews.
Someone is always turning on the Jews. The Jews are always turning on someone. People turn on people.
"They put on a front that appears accommodating, loyal, and yes, even sacrificial. Then, without warning, they raise their knife, and by the time you see the glint of the blade, it's almost always too late."
Volcker trashed the dollar and that is missing from the balance sheet of this review. The great balance sheet mop is also real. That is where all your 'flationary velocity is hiding.
On the contrary. The dollar rose to tremendous levels not seen since on FX crosses 1980-1983 because US rates were so much hgher.
He banged the inflation out so he could trash the dollar.
http://www.financialsensearchive.com/fsu/editorials/2010/0105.html
Yet they still killed off the brown belt rather then address the productivity issues; and in doing so by exporting production profits increased retaining control of distribution and retail pricing as China exported consumer price deflation. As much or more trickle down into the fake services & communications economy they were buildiong as from military industrial off sovereign debt.
80's sovereign debt curve was a beauty wasn't it? You can argue the Clinton-Rubens-Summers trick of fake surplus and massive current account debt binge was the direct product of being back into that corner by Volcker-Reagan-Bush Sr.
Hmm.... I think currency crisis first, economic catastrophe, and fed money printing to keep the govt going.
I just Love it! Thank you so much sincerely,
There's a fallacy in the argument that "Volcker killed inflation", just like St George slew a jabberwocky dragon in the mythic fog of Olde England. That's the stuff of mythology.
Objectively, 1970s inflation began with the first oil shock (1973) and ended when the House of Saud went against OPEC pricing structure and drastically cut the price of oil beginning in December, 1980 (just after the end of the Iran hostage crisis).
An oil glut quickly followed the shortages of the 1970s. Producer and consumer price growth tumbled not only in the US but in all developed countries. And that led to a drop in interest rates in those same countries.
Gonzolira's question: would hyperinflation have followed inflation without Volcker raising the Fed funds rate? A better question would be: what happened in the US before the Fed existed during times of critical shortages? Examples actually exist. The great Anthracite Coal strike of 1883 is a comparable situation from a time when all rail transportation, factories and domestic heating depended on oil. Before the strike was settled by Presidential intervention there was a spike in inflation, along with factories shutting down and high unemployment (analogous to "stagflation"). After the political issues were settled, price returned to normal. there was no hyperinflation.
I wish I had been there then in 1979 to get a better understanding of where we are heading. But I was only a sperm in 1979. What a pity!
It was an interesting time in '79. America was over all the articles read. 18% inflation, 21% interest rates, 13% unemployment, death of Phillips curve. People now are feeling bleak and hopeless imagine what it was like then. Despite all this it was a bottom both economically and politically. There was a turn and the gold to infinity scenario didn't happen. Volker raised rates to blow up everybody that had made huge bets on inflation - easy money in those days.
One could argue we need to do that again to blow up every single one of these ponzi schemes that have climbed onto the back of the common man.
A very important lesson from those times is that there WAS a bottom there WAS a turn - stay sharp.
Even if Paul Volcker were the current Fed Chairman, he would have little options left. Suppose there were a hyperinflation at the moment. If he raised the Fed Funds rate, the US would definitely default on its debt and the dollar would be screwed. The US didn't have so much debt back in 1979 but it has it now, not to mention the social benefits obligations etc. Perhaps the US wouldn't be so luck this time and the dollar demise is inevitable. Just look at ancient Rome, it stood against the barbarians for hundreds of years. But in 410 AD, it fell and gone with it the Roman Empire.
"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929
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,
The analysis 1)underestimates Bernanke 2)assumes that the collapse won't be intentional.
A collapse of the U.S. economy will lead to a new world currency from the IMF. They already have plans in place. This will lead to a collapse of our sovereignty and an introduction to a world government (new world order -- where does that keep coming up). So maybe you should consider the possibility that the collapse (hyper-inflation) will be intentional. Underestimate the elite globalists at your own peril.
just watch the first 10 minutes:
http://www.youtube.com/watch?v=eAaQNACwaLw
During the high interest rates period, everyone and their mother (literally my mom) bought exorbitantly high interest rate CDs and government securities, which reduced, to some extent, the amount of FRNs running loose which would otherwise be used to bid up goods. I see the signs right now of commodities, led by gold, starting their climb, and don't see what turns that trend (god forbid we should not have a sector in a bubble) other than higher interest rates on bank CDs and government debt. No one but a crazy person seeks returns in the equities markets, debt is over priced and under-yielding, and so the chase for returns will now head to commodities - foodstuffs and PMs, but not real estate - you don't need that to live. So stagflation is, I think where we are headed.
Can't believe that no one has even mentioned what Volcker went hunting for...he had to kill inflation expectations.
Once expectations got loose...the wage-price spiral careened out of control.
[For those unfamiliar, high inflation expectations get incorporated into wage contracts which in turn forces price increases, and then the spiral continues. Unhinged inflation expectations are necessary for stagflation.]
Commodity prices are rising powerfully NOW! It's not just gold. Corn blasted through $5/bushel this evening. Sugar and cotton have been rising almost daily since May. Futures for soybeans, coffee, wheat, oats, rice, cattle, hogs, milk, soybean oil and soybean meal, orange juice, etc. are all rising strongly! Even cocoa and nat gas, which had been trending down, have now reversed and are in an uptrend.
Don't look for commodity price inflation in the future. It's here NOW!
Volcker's raising of interest rates did not kill silver. The CFTC changed the rules of the game on the Hunt Brothers. The CTFC limited the number of contracts the Hunt's could hold, and their silver pyramid collapsed.
What would be the outcome if Geithner suddenly got the yuan appreciation he keeps demanding?
HYPERINFLATION AMERICAN STYLE
http://williambanzai7.blogspot.com/2010/09/hyperinflation-american-style...
$99
http://williambanzai7.blogspot.com/2010/09/from-here-to-hyper-eternity.html
This article is wrong on a variety of levels.
Volcker didn't kill inflation. The FFR followed the effective interest rate expected on the dollar. The dollar was facing a run after the close of the gold window and US Peak oil in 1970.
It really was as simple as that. We were facing suddenly massive trade deficits placing pressure on our currency. Pretty simple stuff.
The run on the dollar was quelled via the petrodollar racket. Effectively, we hardened the dollar using oil. Dollar growth matched oil growth. Prior to US Peak, our dollar was effectively hardened by gold, but also by growing domestic production.
After US Peak, it took us awhile to acquire vassal states such as KSA upon which we could pin the dollar. Recall that Nixon was going to fucking invade the ME and occupy fields if the embargo had run on long enough.
There were a few factors which caused a run on the dollar, US peak, waning gold reserves, the closing of the gold window, and the 1973 embargo. If we didn't offer gold, you couldn't buy oil, wtf was the dollar worth? So we used imperial military power to harden the dollar back up.
The notion that Volcker had anything to do with this is absurd. High interest rates are evidence of a run on a currency, and will cause *deflationary* collapse and ultimate currency worthlessness.
That's basically what I said above, to wit: Volcker's actions were pretty meaningless compared to broader economic and energy security policy enacted by the Administration.
Absolutely nailed it. The dollar could not buy the raw materials that we needed and therefore dollars were fleeing to gold and silver. Volker merely increased the "yield" on the dollar and dollar denominated assets to levels above inflationary expectations in order to compete with gold and silver. Couple that with organized suppression of PM pricing and it is easy to see how the dollar's collapse was delayed.
Yet "delay" is all that happened because the underlying problem, as expressed countless times by B9K9, Mako, and others, rests in the inability of real productive assets to yield sufficient returns to service our debt. Why the hell else would you pay debt by issuing more debt? It is so godamn simple it is embarrassing how many people don't get it until you realize the intense psych. pain that such a realization/admittance brings.
Amazing article. So original! The HFTs have taught us that it only takes a single share to bid up/down the price of something. If the same dollar is in a constant state of hot potato, then it doesn't matter about the absolute value of the physical dollars.
Where would interest rates and stock markets be right now if there was zero intervention?
Interesting times we live in.
At the risk of sounding stupid, can someone enlighten me about the details of the mechanism whereby increasing interest rates works against inflation?
Intuitively I tend to agree with GL, but I sense a big gap in the logical demonstration regarding this point.
Note that the same logic gap appears in many such discussions...and never seems to be addressed by anyone. If it's so obvious that no one discusses it...but 50% disagree about the conclusions, perhaps revisiting the un-stated assumptions would be a good idea?
It's through the money supply. As the government increases interest rates, this makes the cost of borrowing for consumers and business more expensive. As a result, spending starts to slow down... meaning that there is less demand for goods/services... which leads to the eventual drop in prices.
Why would that be any different from the underlying fact that prices are already on the rise?
Your argument implies that inflation by itself would lead to the eventual drop in prices, when inflated prices are too expensive, resulting in a spending slow down.
I was just trying to answer his question about why prices rise (in a stable working economy) - basic economic theory.
Now - to your point, inflation in a ("functioning economy", where you don't have massive amounts of free money floating around in the system), inflation is "tamed" by the increase in interest rates, which chokes off consumer demand.
For example, in a functioning economy, let's say I want to buy a car but inflation is at 6%. This means that people have been over spending (probably due to using too much credit). Well, the government increases interest rates to the point that perhaps I start to say that the price of that car is getting too much and the cost to borrow is getting to high for my budget, then I would not buy. Over time, more people will come to the same conclusion (especially if the govt is raising interest rates). Then one morning, the car company wakes up and realizes that they have too much inventory on hand because people like me have decided to not buy. As a result, demand cools down... prices start to fall because the dealers want to move inventory... and over time, equilibrium starts to set back in around supply and demand. This is a simplistic explanation, to illustrate the point. Reality is a bit more complex. Years ago, Volker increased interest rates to the point that he induced a recession, which caused inflation to fall... which eventually led to falling interest rates.
I've not gotten into the effect of how central banks can also play with reserve ratios, etc... which also can affect the availability of credit... you can read up on this on your own.
BUT THE MESSAGE IS THAT THIS ONLY WORKS IN A FUNCTIONING ECONOMY... WHICH WE ARE NOT IN. In our case, we have the effect of ethanol on corn prices, wheat crop yields that are impacting feed for livestock, which has driven up prices... and FEAR, which has started the rise in precious metals as a store of value.
I hope this helps.
Yes, thanks, it helps: the qualification "BUT THE MESSAGE IS THAT THIS ONLY WORKS IN A FUNCTIONING ECONOMY" is essential to understanding the basic assumption in GL's post.
In most debates on this topic, people are comparing two (or more) different economies (time, place, etc.) which are all not quite working (obviously depends on whose definition we use to say they are not working - but if we're speaking about them, it's safe to assume all is not pink).
What make comparisons of problems and solutions very difficult, is that the broken parts of these economies are usually different - I find it very dodgy to state in a general way that "raising rates would address inflation issues".
GL, wonderful post, again. I hope that we are not staring '79 in the face (as demographically and fiscally, we are in much worse shape now than then), but you certainly provide a lot of food for thought. I think that the Fed and Treasury need more history majors and buffs and fewer economics majors.
Everyone needs to take a trip to the supermarket. The prices being charged are insane, yet commodity prices have not really soared, with the exception of the Russian wheat flash scare. There is a ton of capital just waiting for the "next big thing." Between the hysterical "news" and hot money, a fake "crisis" can be made overnight with the result a huge financial gain for a few and a loss of net worth for the rest. What will it be this year? Bird Flu. Bad Eggs. Bed Bugs. Meteor Storm. Al-Qaida Robots. The next scare will be food and hence commodities. But you can't squeeze an infinite number of happy meals from an unemployment check. There are political realities for unemployed people. Those realities start shooting when they are hungry.
The End Game to all this nonsense is for a select few to have a boundless international currency that floats in the ether controlled by stateless forces. We would be farther along in all of this if carbon taxes were passed and Al Gore was getting his second Noble Prize for taking our untrustworthy USD trading carbon credits and exchanging them for XDR; to be used for what and where ..?
I wouldn't be reinventing the wheel here, but I just want to underline a pretty simple issue that is wrong with Bernanke and his minion shills. For some unfathomable reason they think that economy is S&P, bonds, UST and money is debt. Whereas in the real world the economy is people with their purchasing power buying stuff they need (or they think they need) and money is just a medium for exchange.
Until there is a paradigm shift in the understanding of the basics of realworld economy - either through a blast of cognition (highly unlikely) or through a change of the players (more likely, but only after the shit really hits the fan) - the current downward spiral will merrily continue.
And a very big thanks to Mr.Lira for his wonderful articles that even a lowbrow like me can grasp.
And here I had been thinking that the run up in Chinese pig farmer essentials (gold, silver, copper, ore, condo's, farm land & APPL among them) had been the kick off to this move to commodities you speak of GL...
Nice read
CPF essentials. LOL!
Hyperinflation, biflation, deflation, stagnation - would the right label make us feel better? |B^)
Analyzing the past events, well,
History doesn't repeat, it rhymes. |B^)
It's never be the same, just similar, right?
It was a different country in 1979-83, as others have pointed out.
Human nature stays pretty much the same, though. Nassim Taleb's approach is really about human nature - false beliefs, and the danger of acting on those beliefs. He made millions in the 2008 crisis.
He watched the banks getting bigger and bigger, and more and more complex. Their products did the same thing, so he knew it was creating a fragile system, and that they would fail.
Nothing has changed, really, since they got bailed out. They are still in trouble and still fragile.
Human nature may not change, but the amount of information that's available does. That's why I think the next bubble/crisis is going to be different.
We've been through 2 meltdowns in a decade. It seems to take two instances for people to "get it", and adjust.
Retail traders have already bailed out of the market instead of riding it all the way down as in the tech bubble. They understand bubbles a lot better now, and have lost their buy and hold "faith". This leaves a lot less suckers for Goldman to fleece in order to "harvest alpha". |B^)
They won't come back in until a major crisis occurs that forces regulatory changes that will protect them. It could take many years.
With retail gone and market full of robots, hedge funds, and prop shops, we'll likely get a drop straight down to the timeouts.
That could be why the market is not moving on fundamentals. Bad news and it falls, but any tidbit of good news and it shoots up. Maybe without retail the constant robotic trading is propping the market up.
I thought it all started in 1973, when OPEC just decided to let the good-ole Texas oil-men know who was really boss. Just like China is doing now. We have been running on 3 wheels for nearly 40 years now, amazing how much wool has been covering so many eyes.
Nevertheless, Gonzalo -great stuff. I hadn't heard of your work until about a month ago.
So many great thinking and 'un-registered' writers out there getting their message discussed. Gives ya hope.
.
Review your history, Hoss. OPEC let the American people know who was boss. Texas oil men profited from OPEC's action.
DO YOU REMEMBER THE MUNSTERS?
http://williambanzai7.blogspot.com/2010/09/grandpa.html
The mixed conflicting market signals return. It reminds me of periods in 2007/2008 during the market uncertainty and dislocation in addition to market intervention or rumours of market intervention (like the QE chatter now).
http://stockmarket618.wordpress.com
a little late with this one tyler....I sent this article to you yesterday morning, hours before I sent it to jesse and gata....didnt you realize greenspan saying "fiat has nowhere to go but gold" was an historical event?
So Paul Volker is Justin Beiber and GL is a 14 year old girl. Next.
I think your premsis is interesting and, under other circumstances, likely, except it's not going to happen. I say this because the central bankers won't allow it to happen. Bernanke's people who watch computer screens, when they observe the first hints of what you're suggesting, will make some phone calls, and the people responsible will be told to stop or they'll get thrown out of their high-rise office window. Sound like the Godfather? Sure, but everyone's in a locked room now and the exits are blocked.
For evidence of what I'm saying, remember that incident on the Italian border a year or so ago with 4 Japanese nationals caught with a bag stuffed with US Treasuries? You think such cloak-and-dagger stuff would be necessary under normal market conditions? They had to resort to that because they weren't allowed to sell that much treasuries. And that incident is all we know about. If it happened once, there were probably other incidents that never hit the news.
Probably the only ones who could get away with it are the Chinese, and even then I'm sure they're under threats.
I think the first part of your scenario will hold true, but the money that wants to flee Treasuries won't be allowed to. Commodities like gold and silver and others are already heavily manipulated will prevent them from shooting to the moon. My conclusion is that one day the economy will simply grind to a halt, probably with little warning. No one's credit cards will work, the ATMs will be stopped and the banks will close and everyone will wonder what hit them.
Interesting thesis but does not go back far enough. You would have to go back at least to the sixties to find the root causes of the inflation that blew up the seventies.
The US had 4 very expensive programs that called for deficit financing. The Cold War, the Vietnam war, Johnson's Great Society social programs and the space program. All these were on top of a generally Keynesian, inflationary mind set dating back to the end of WW2.
The country's capital was all spent by 1971. Nixon didn't slam the gold window shut for the fun of it. He did it because over the previous 25 years, the government had spent all the money in Fort Knox and there was practically nothing left.
I would like to see an analysis of how the whole mess developed from the late 40s to the early 70s, how it blew up in the late seventies, and most fascinating of all, how you got to 20 years of prosperity from the early 80s to the early 2000s seemingly for nothing and without correcting any of the original problems.
Well, we have far more creative methods to induce hyperinflation these days. check out the latest quarterly Flow of Funds release out today: http://www.federalreserve.gov/releases/z1/Current/z1.pdf
Apparently, the "Household Sector" bought $980.4B more of Treasuries... F.209 page 44.
Sure, interesting piece, but you ruin the whole thing by starting with language about a run a Treasuries......why on earth do you and basically the majority of the world have such a hard time understanding that a capped interest rate CANNOT RISE in a full-blown money printing scenario??!? It's the currency that will take the full hit, not the Gov't bonds! It's so simple - if Bernanke provides a non-stop bid on the entire curve (and keeps completely ignoring money supply and money printing, like always), the entire curve will have capped yields, making it impossible for bonds prices to collapse.
Very tight correlation between M2 & M3 and CPI (w/o lies after 1980-2), when data is smoothed.
http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png
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