Posted on 11/25/2007 5:15:20 PM PST by Travis McGee
Judging by the behaviour of world markets last week, investors are now convinced the credit squeeze is harming the real economy. In other words, in terms of a question I posed last week, they think this crisis is more like 1989 than the more benign one of 1998. So let us give the screw one more turn. What price 1973?
Anyone with memories of that time will shudder at the comparison. In the UK, the FTSE All-Share index plunged more than 70 per cent in the space of two years. By 1975 inflation rose to 27 per cent, at which time UK Libor stood at an astonishing minus 16.4 per cent in real terms.
Some investors will find that notion simply irritating. Inflation is subdued in all the main developed economies. Why create a problem where none exists?
But this, it turns out, is the crux of the matter. Wall Street is screaming at the US Federal Reserve to cut rates.
As Merrill Lynch put it rather crossly last week, "the Fed still does not grasp the severity of the real estate deflation and credit crunch". In the futures markets, the probability of the Fed not cutting next month is now put at zero.
But the Fed is genuinely worried about inflation, as is the Bank of England.
If it is forced to cut rates, it will presumably be more worried again. What we have here, as Morgan Stanley remarks, is a disconnect that will not go away soon.
Some would say severe inflation is today impossible, since central bankers have learnt better. That was certainly the view around 1970, after 20 years of non-inflationary growth - rather similar to the so-called Great Moderation of the past two decades.
As a result, investors were continuously behind events. One sign of this was that during 1975 real yields on US Treasuries averaged minus 3 per cent and real gilt yields minus 11 per cent.
As to what might spark inflation this time, there is no shortage of theories.
Perhaps the most weighty is that proposed by Alan Greenspan: that after years of exporting deflation, China and India may now start exporting inflation instead.
But perhaps we should examine parallels with 1973 on a broader front. Ian Harnett of Absolute Strategy Research puts the case as follows.
In the early 1970s, the central problem was that the US was engaged in a costly war that it could not afford. One result was a weakening of the currency which - at a time of fixed exchange rates - chiefly expressed itself in a fall of the dollar versus oil and gold.
As a result, the exchange rate system collapsed. That left countries with a choice: whether to peg their currencies to the dollar and import inflation, or float and import recession. And this, of course, is the choice now facing China and the Arab oil-producing states.
Indeed, Mr Harnett suggests, they may come to face a more perilous choice again - whether to put their surplus reserves into less risky currencies, meaning those with current account surpluses.
In that case, presumably, so much the better for Japan and Switzerland - and so much the more expensive for debtor countries such as the US and UK.
Inflation would make it more expensive again. Here, there is a direct contrast with 1973. Then, savers had no direct experience of inflationary conditions.
The result was a massive shift of wealth from savers to borrowers. The smart move, it turned out, was to buy a house on the biggest mortgage possible - or, for governments, to issue the maximum amount of self-liquidating debt.
Today, those in late middle age will make no such mistake. In 1973, as I can attest, spasms of panic could be induced by the simple act of visiting the supermarket and checking the prices against a few weeks before.
That is not an experience one forgets. Investors of that age, whether amateur or professional, are now in the driving seat. If inflation takes hold - indeed, if it simply becomes more volatile - the result will be an inflationary risk premium. And in a savers' market, it will be the turn of borrowers to suffer.
Of course, we are not there yet and may never be. All that is happening now is a worsening 1989 scenario, with Goldman Sachs - for instance - arguing last week that US house prices have 13 to 14 per cent more to fall, or 35 to 40 per cent in the case of California.
I am not, after all, seeking to propound any vulgar fallacies about history repeating itself. The point of such exercises is rather to expand our conception of the possible.
In that spirit, a seasoned stockbroker of my acquaintance dismisses my 1973 comparison. The true parallel, he says, is 1929.
But that, surely, is going too far.
Hey we are not talking viagra here....are we?
I stand guilty of being a gold bug. Got rather rich thinking like that. LOL
LOL, Nope. A normal online transaction. I called customer service and they said my account was dormant. I would need to show up at a branch. I told them it was a pleasure doing business and wished them well. Tomorrow I liquidate and move on.
Weatherford National Bank. Weatherford, TX. That’s in north central Texas about 30 miles west of Ft.Worth-Dallas.
Couldn’t help but notice your graph was not just from Bloombergs, but provided by SOCIAL SECURITY. They’ve been jacking around with the CPI for years. They can’t admit and/or pay more than 2 and a half percent COLA to retirees or they’d be in even worse shape.
If I here of anything in Houston I will let you know.
“Got rather rich thinking like that.”
Yeah, me too. Rather nice to be hated for it.
As near as I can tell, this boondoggle of hyperinflation of assets, with the consequent transfer of wealth to those who believe in debt and paper including nominal title to real estate, and the beggaring of those who believe in working and saving has been going on more or less nonstop since 1973.
Well, if nothing else, at least you now know how the CPI is calculated. That’s probably a good starting point if you’re going to take issue with it.
Hey you! Hope you’ve been O.K. We’re all good here! :-)
It doesn't matter where the graph comes from the methodology will be the same.
They’ve been jacking around with the CPI for years.
Even if the SS administration is playing games with the CPI, that doesn't change how it's calculated.
They can’t admit and/or pay more than 2 and a half percent COLA to retirees or they’d be in even worse shape.
Does this, or anything else you have prove the real rate of inflation is 10-14%?
Many college students only spend their parent's money on food and beer. What is the inflation rate for these people, now that anecdotal is ruling the discussion? The dollar has lost a third of it’s value in the last three years. That’s really your true inflation rate.
The dollar lost this value against some other currencies. Are you suggesting that you (and others) have been converting (or paying) your way using other currencies? Who are you people, the ones whose sole budget expenditures are strictly confined to food and energy?
Save your hyperbole for people a little less bright and a little more gullible; you'll be a tad bit more convincing and persuasive that way.
Yeah, I’ts nice to have the last laugh after all the years of ridicule.
I guess I am one of those. I am a professional living in DC, and see the cost of everything skyrocketing. Of course my cost of living doesn't increase, because my salary does not. As the dollar drops, French wine goes up (no tears from you I am sure). Guess what - the California Cab right next to it went up too. With more for fuel, food, etc. I sure eat out a lot less. I see that there is an article in the LA times about that problem too. Eating out is getting lonelier
To "fix" the depression, Roosevelt seized control of the economy to such a complete extent that government bureaucrats thought they could improve the economy by destroying farm products and forbidding people to negotiate prices. They started the insult to liberty by forcing people to "exchange" their gold coins for paper money.
see: America's Great Depression by Murray Rothbard: (free book via download of the PDF)
http://www.mises.org/rothbard/agd.pdf and the article,
Introduction to Rothbard's America's Great Depression by Paul Johnson:
http://www.mises.org/article.aspx?Id=447
From the review:
"...The severity of the Wall Street crash, he argued, was not due to the unrestrained license of a freebooting capitalist system, but to government insistence on keeping a boom going artificially by pumping in inflationary credit. The slide in stocks continued, and the real economy went into freefall, not because government interfered too little, but because it interfered too much. ..."
"...We now see, thanks to Rothbard's insights, that the Hoover-Roosevelt period was really a continuum, that most of the "innovations" of the New Deal were in fact expansions or intensifications of Hoover solutions, or pseudo-solutions, and that Franklin Delano Roosevelt's administration differed from Herbert Hoover's in only two important respects—it was infinitely more successful in managing its public relations, and it spent rather more taxpayers' money. And, in Rothbard's argument, the net effect of the Hoover-Roosevelt continuum of policy was to make the slump more severe and to prolong it virtually to the end of the 1930s. The Great Depression was a failure not of capitalism but of the hyperactive state. ..."
“Who are you people who only spend your money on food and energy”
“Save your hyperbole for people a litte more gulible...”
I’m an elderly retired rancher on SS. Trust me, retirees like me can only afford food and energy. My ranch is paid for, but to keep my AG exemption, I buy about eight tons of hay every two months to feed my cattle. We make nothing when we sell them. Hay last year was 260.00 a ton. (the year before that only 70.00 a ton—hows that for inflation?)Prairie fires burned a lot of the land.
Diesel 3.35 a gallon for the tractor. If we didn’t raise our own food, we’d be up salt creek, but it takes almost every dime to feed cattle, chickens, buy feed and fertilizer-—then there’s elctricity, fuel to pump water....yada, yada, yada. Sorry to irritate you, but I wonder if you have any idea how many people in fly over country live. Next time you go into a grocery store to buy food you might think of us.
Hi, Kevin. Been wondering about you. Hope you and yours are doing OK> Watch your mail.
See post 38. Farmers and ranchers like us know nothing about some of the items on the CPI. Not in our budgets.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.