Poll: The Great Inflation

[MachineGhost]

Choose your poison!

[Pointedstick]

#6: I haven't a clue!

[dragoncar]

#6: I haven't a clue!

Me neither, but I voted anyways. 

[Stunt]

Born in '83 - no clue...

[AdamA]

Which choice has to do with Nixon closing the gold window?

[MachineGhost]

Which choice has to do with Nixon closing the gold window?

Hmm, I don't think any of them do but that happened late in 1971 or thereabouts, not in 1960.

[moda0306]

War in Vietnam for another piece. Not WWII by any means but wars are inflationary.

[AdamA]

Which choice has to do with Nixon closing the gold window?

Hmm, I don't think any of them do but that happened late in 1971 or thereabouts, not in 1960.

Wasn't it in the 1970's that inflation got really bad?

[MachineGhost]

War in Vietnam for another piece. Not WWII by any means but wars are inflationary.

That would be covered under "Demand-pull inflation via economic growth (faster than capacity)".

[MachineGhost]

Wasn't it in the 1970's that inflation got really bad?

Yeah, but that's not when it started.  Rates starting going northward in 1960.  Why?

[MachineGhost]

I've add two new options and reset the poll.  So please vote again.  This time if you don't know the answer, please don't guess.

[dragoncar]

I've add two new options and reset the poll.  So please vote again.  This time if you don't know the answer, please don't guess.

So basically nobody vote.

[Lowe]

Clock this figure through 1960 - 1980, and watch as the 18 - 25 cohort increases.  The workforce went up quickly over this period, due to demographics, and to women's lib.

Here is a great explanation, with labor force and productivity figures that really tell the story.

The root cause of the high-misery-index 1970s was demographics, plain and simple. The deep capital stock of the economy — including fixed capital, organizational capital, and what Arnold Kling describes as “patterns of sustainable specialization and trade”? — was simply unprepared for the firehose of new workers. The nation faced a simple choice: employ them, and accept a lower rate of production per worker, or insist on continued productivity growth and tolerate high unemployment. Wisely, I think, we prioritized employment. But there was a bottleneck on the supply-side of the economy. Employed people expect to enjoy increased consumption for their labors, and so put pressure on demand in real terms. The result was high inflation, and would have been under any scenario that absorbed the men, and the women, of the baby boom in so short a period of time. Ultimately, the 1970s were a success story, albeit an uncomfortable success story. Going Volcker in 1973 would not have worked, except with intolerable rates of unemployment and undesirable discouragement of labor force entry. By the early 1980s, the goat was mostly through the snake, so a quick reset of expectations was effective.

[MachineGhost]

So basically nobody vote.

No, I mean I provided an answer to choose if you don't know the answer.

[hazlitt777]

From my knowledge of the period, it was guns and butter.  We couldn't find the money through borrowing or taxation.  So the Federal Reserve increased the money supply, and the net effect was an increase in prices.

[MachineGhost]

From my knowledge of the period, it was guns and butter.  We couldn't find the money through borrowing or taxation.  So the Federal Reserve increased the money supply, and the net effect was an increase in prices.

So why don't we have higher rates despite the Guns 'n Butter of the last 12 years?

[WildAboutHarry]

Purely observational notions, from someone who turned 18 in 1970.

1) The Baby Boom.  We needed lots of infrastructure (schools, etc.) and stuff in general.  High demand.  Besides, it is fun to blame the Baby Boom for everything!

2) Various wars (on poverty, Vietnam, cold, etc.).

3) The Energy 'Crisis'.

4) Polyester fashions (e.g., see any J.C. Penney Catalog from the 1970s).  Created a general malaise.

5) The Itch-Scratch-Itch syndrome.  If you knew that a bar of soap was going to cost more next month, you bought a crap-load of soap this month.  Repeat throughout the economy.

[hazlitt777]

From my knowledge of the period, it was guns and butter.  We couldn't find the money through borrowing or taxation.  So the Federal Reserve increased the money supply, and the net effect was an increase in prices.

So why don't we have higher rates despite the Guns 'n Butter of the last 12 years?

I believe those rates have been kept down by the Fed purchasing any unsold bonds, thus the rates do not have to go up to attract private market buyers. 

[Lowe]

So why don't we have higher rates despite the Guns 'n Butter of the last 12 years?

I believe those rates have been kept down by the Fed purchasing any unsold bonds, thus the rates do not have to go up to attract private market buyers.

QE3 ended in October, and 30-year treasury rates, which many said had nowhere to go but up, have continued to go down.

I think in the 1970s the Fed may have been trying to maintain employment, as their highest priority.  Had they raised rates, to influence businesses and financial institutions to de-leverage, they would have reduced employment, maybe a lot.  But maintaining employment made inflation worse.  So they were riding a tiger.  You can't get off because then it kills you, but holding on sucks pretty badly too.

Today there is no tiger, because we are not in a demographic boom.  The Fed can keep rates low perpetually, at little to no inflationary cost (both in terms of the FFR and Treasury yields).  Or rather, let them stay low, because that's where banks want them... how else are they going to get people to take out loans?  Debtors aren't just lining up.

[hazlitt777]

So why don't we have higher rates despite the Guns 'n Butter of the last 12 years?

I believe those rates have been kept down by the Fed purchasing any unsold bonds, thus the rates do not have to go up to attract private market buyers.

QE3 ended in October, and 30-year treasury rates, which many said had nowhere to go but up, have continued to go down.

They can say QE3 ended, but who is buying the over 1 trillion of new debt we added over the last year?  The increase in debt didn't stop in October.  I say there is a hidden QE.  With the economy slowing we should be in a major deflationary period.  Instead, there is deflation in oil, but not in the stock market, and not in gold, and not in food, to give a few examples.  So they can say they have stopped money printing...QE...but I don't see how they could have.

[Pfanni]

After the end of Bretton Woods the chicken came home to roost.
USD was the official reserve currency of the world, redeemable in gold. So the US could run a huge trade deficit & fiscal deficit (making those pesky foreigners pay for its lavish lifestyle via NON-appreciation of their currencies because exchange rates were fixed).
But gold kept rising and the US administration couldn't keep that artificial peg (35 USD / ounce), Nixon "temporarily"  closed the redeemability in gold and alle the currencies in the world became free-floating (paper valued against paper).
USD devalued a bit against the other currencies, pushing up inflation. But, more importantly, all those homeless dollars all over the world went looking for a new home and flooded back to the USA, pushing up prices.

Along came Paul Volcker and jacked up Fed rates (which he could easily do back in the day, because total debt / gdp was low). USD strengthened, but this killed all the blue collar jobs in the eighties and offshoring became the word of the decade.

How could the US middle class & society as a whole keep up? Why borrow, of course. Total debt / gdp went through the roof, all paid for by the slave workers in Asia via non-appreciation of their currencies.

Proof: USD money supply increas 10x since 1980, but the CPI only tripled.

USD still quite strong up to this day, but the price is that all the jobs & factories went to China.

And that's about where we are today. USD still reserve currency, foreigners hungry for USD forcing the US to have giant trade deficits, nobody wants a strong currency in order to keep factories & jobs from offshoring, USD appreciating.... but, again, all those homeless dollars will flood back to the US and then you will have your big inflation and then gold will have its day in the sun.

Wikipedia: Triffin dilemma

Great blog, but very in-depth on the subject: fofoa.blogspot.com

Even greater blog on this whole 1st/3rd world exchange rates & job offshoring conundrum: ponziworld.blogspot.com

[Lowe]

@ PFanni

Do you think that foreigners selling their US dollars, back to people in the US, is the reason that inflation was high for a decade?  If they are selling dollars back, then they are either getting goods or other currencies in return.

If they were getting goods for their dollars, then this would have made the US a stronger exporter.  It looks like it was until 1976,  in terms of the trade deficit.  However by the late 70s the US was running a larger trade deficit.  So either the foreigners had stopped buying goods, or US imports had increased somehow.  Why would that have happened?

If they were getting other currencies for their dollars, the dollars would have gone to US banks.  The bankers who bought the dollars would then try to deploy those dollars in loans, if they could.  Inflation would only result if they succeeded.  So the question is did they succeed, and why.

[hazlitt777]

They can say QE3 ended, but who is buying the over 1 trillion of new debt we added over the last year? 

Banks, investors seeking safety.  PP denizens. The usual.

The increase in debt didn't stop in October.

The deficit has been shrinking, but I expect you are right that it is still positive (i.e. outlays > tax receipts) .  I haven't been keeping track.

I say there is a hidden QE. 

No, there isn't.

In any case, deficit spending certainly increases the net financial assets in the private sector, regardless of whether or not there is QE.  That said, we have a debt-based money system, and so bank loans have far more influence on the money supply.
[/quote]
Whether it is QE or investors buying the debt, either would explain why interest rates have not risen.  I think we both agree debt is still increasing in the world and that it is one central bank or another that is buying it, not just investors.  So it will be inflationary.  And if it is only investors buying, well they must be doing a good enough job that rates have not had to go up.  I don't see any other explanation.  How else would interest rates be staying so low? 

[Lowe]

Debt is increasing, but is it increasing faster than the supply of goods on which to spend it (it being the created checkbook money)?  If not, there won't be inflation.

The reason there isn't high inflation is that debt, in loans given to gov'ts or everyday people, is not growing that quickly.

I don't know why for certain.  H'e my guess is that loans, commercial and consumer, are given only to the extent that there are productive people around to receive them.  There aren't that many productive people around, and their numbers are going down all the time.  That is due to the demographic decline of more educated Westerners, and to the increasing specialization of high-productivity labor.

[Pfanni]

Just think abou this for a moment.
Why does a barista in the USA make more mony tham the iPhone-assembly line worker in China?
Higher productivity? No. Isn't something out of sync here?
Again, no country wants a strong currency anymore, to keep the jobs at home.
USD appreciation is actually not in the US' interest, I bet if oObama and Yellen could, they would
d like to have the USD 30% lower to get some people employed.