13 ms·

What the Great Inflation (1965-1982) taught us

97 points by rock3m 4y ago

atq2119 4y ago
It's a weird choice to (1) pick 1965 as the starting date and (2) not discuss at all the fact that peak inflation followed the oil price shock of 1973.
- readthenotes1 4y ago
  1965 is when inflation started kicking in (we have a recording of a family dinner from around that time and the mother was complaining about inflation). It looks like there were three peaks in overall inflation mountain range, and only one of them was from the oil price shock. I believe the author might have been using the article she linked as a major source: https://www.federalreservehistory.org/essays/great-inflation https://www.federalreservehistory.org/essays/great-inflation
- foobiekr 4y ago
  1965 is a commonly picked start date because it is the worst time in the last 100+ years to retire with a self-funded portfolio. It’s commonly used in the FIRE community to check withdrawal plans.
  - paulpauper 4y ago
    It depends on your individual consumption preferences. Just because the CPI is 7%/year does not mean you are losing 7%. If you have $1 million in cash and your expenses are $40k/year and CPI goes up 10%, then all you need is to invest the $960,000 in fixed income to negate the increase of $4k due to inflation, which is easily doable. If you are taking that $1 million and buying only energy or only food with it, then you would lose a lot of potential purchasing power but most people do not do that. Food and energy are only a small % of one's wealth beyond a certain amount.
    - terminalcommand 4y ago
      Another perspective, we have 83.45 %/year CPI inflation in Turkey. This is the official number an independent research group of academics claim it is nearing 200%. The official interest rate is 10.5%/year. You get maximum 20-25%/year interest on savings accounts. Real estate market and rents go up 220%/year (by the official numbers). Before doing FIRE purchase your own home or sign a really long term lease with upfront payment and no increases, inflation caused by corruption (as in my country's case) wreaks havoc on savings. It is simply not possible to invest in anything that can keep up with the inflation, you get poorer by the day.
      - reducesuffering 4y ago
        Yes, it is underappreciated in urban circles how much owning physical assets (land, reliable fuel-efficient vehicles, fruit trees, tools, wood for construction & heat) help weather rough times. They're very frequent in history, but a scant memory for many in the west. Digital IOU assets will not completely cut it.
        bombcar 4y ago
        It’s a scenario that has happened many times in many countries, which means it can be studied and investigated. John T Reed wrote a book on it which has decent amount of research and ideas - https://johntreed.com/collections/john-t-reed-s-book-on-hyperinflation-and-depression/products/how-to-protect-your-life-savings-from-hyperinflation-and-depression https://johntreed.com/collections/john-t-reed-s-book-on-hype...
      - Rufbdbskrufb473 4y ago
        > It is simply not possible to invest in anything that can keep up with the inflation Why not just invest in diversified real estate rather than betting on a single property and its local market? In expectation, the returns should be similar on average but with lower volatility. I'd rather rent and put capital in a real estate investment fund. I guess something could be said for buying a property if you're very certain that you'll live there for the rest of your life, but if you would ever like to move, you'd be highly exposed to fluctuations in the value of a single asset, your home.
galaxyLogic 4y ago
If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need more unemployment. We need economic hard time so that people will not have too much loose money any more. We need more unemployment so that employers don't have to pay bigger wages causing wage-inflation. To me this sounds counter-intuitive. How can the solution be more unemployment? People will then have even less money after paying the grocery and gas-bills.
- nyokodo 4y ago
  > People will then have even less money after paying the grocery and gas-bills. Precisely. The less money people have the lower prices have to go for sales to be possible so increased unemployment is a downward force on prices but isn’t all that successful right now when there’s also a massive skilled labor shortage in the vicinity of record expansions of the money supply.
  - rightbyte 4y ago
    Instead of forcing some people into unemployment wouldn't raising taxes a little bit on everyone have the same effect?
    - happymellon 4y ago
      Yes, but the people who raise taxes are not the people who understand economics.
- bfung 4y ago
  > it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People are feeling good cause their companies are doing well, but wait… we should get a raise and get some of that profit! 4. see #1. At some point, this cycle gets out of control and we finally realize “inflation is too high”. For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand. You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations. The US Fed only has 1 tool out of the 3, as congress is the ones with power to raise taxes or add regulation.
xivzgrev 4y ago
Interesting article but she continually cites one source about her hero - Paul volcker himself. I would believe her premise that he broke inflation more if she included other sources, especially other financial leaders from the time.
- ShamelessC 4y ago
  There are several other financial leaders "of the time" quoted and summarized in the article.
Roark66 4y ago
Well, US having the dollar as a the world's reserve currency has it much better in general when it comes to inflation. Just look how Euro has been free falling. I've had an opportunity to observe inflation, followed by hyperinflation, then attempts to fight it with sky high interest rates bringing up massive unemployment and collapse of a lot of businesses. All this happened in the early 1990s in Poland freshly after the communist system went bankrupt and had no choice but to agree to transition to some form of market based economy(with lots of perks for old officials of course - that was the price of peace). It is interesting because back then the method used to fight the inflation was a list of interest rate hikes, followed by privatisation of a lot of state property that was sold for peanuts then liquidated(snapped very quickly by various people "with connections"). However, the tax burden was quite low (no VAT at the beginning, and the huge majority of businesses activity was in the "grey market" anyway). It took years and years for the situation to improve. Of course as with everything in economy there were many factors that led to the crash, not just interest rates. However, it is interesting to see how the current government is taking an opposite path to "fighting inflation". There are some interest rate hikes, but no where near what they should be to quash 20% inflation which we have now. Instead there are various attempts to "buy time". "One time" extra benefits for the pensioners have been quite generous. Laws to help borrowers by forcing 3 months of repayment holidays on mortgages were brought up. VAT for food was taken to 0%, taxes on fuel were lowered. A subsidy for house heating fuel was created, freeze of electricity prices for people and businesses that keep within certain usage limits, direct subsidies to high energy consuming industries. Of course all those things are available as tools, because the country went into this period of time with pretty good finances, but still it is very interesting to see if this "alternative" approach allows the relatively small peripheral economy survive this recession and keep its one of best in EU unemployment rates for long. Especially in light of having to double its military expenses and various expenses connected to the War.
lkrubner 4y ago
The big inflation spikes are always extremely multi-variate and difficult to turn into simple stories. Whereas ordinary inflation tends to be a somewhat simple story of demand running excess of supply, both of the big inflation spikes had large elements of supply side limitations. Indeed, possibly great inflation becomes "great" because it is the supply side problems riding on top of the normal demand pressures, and the two sometimes multiply each other in complex ways. The Great Inflation of 1965 to 1982 came in the second half of the era when the great European empires were coming to an end (1947-1986). The most obvious event of the Great Inflation is the OPEC crisis, which obviously would not have been possible if the MidEast had still been owned by Britain. The independence of the Third World was a necessary pre-condition for the Great Inflation. One possible angle to explore is the extent to which independence allowed the nations of the Third World to demand better prices for their goods -- obviously in the case of oil, but possibly in the case of many other commodities -- and then possibly the way to break the power of the Third World nations wanting better prices for their commodities was for the developed nations to inflict a brutal period of austerity on themselves, cheating themselves so as to cheat the commodity-supplying nations. This was an era in which the number of nations increased, dramatically, as the world transformed from a few big empires to 212 independent nations. Therefore, there was also a dramatic increase in the number of currencies that existed in the world. And so, there is another avenue of research that needs more exploration: whether the increase in the number of currencies that existed in the world lead to a kind of chaotic interference in the markets for currencies -- a world with just 11 currencies is a world where one can almost model the interactions in one's head, whereas a world with 212 currencies is far too complex for anyone to model it in their head. Did the sudden increase in the total number of independent currencies make it difficult, even temporarily, for the markets to send a rational signal about the value of those currencies? Given such a complex situation, it is almost impossible to develop a properly multi-variate model, unless one is willing to devote one's life to the study of the subject, but as a method of getting traction on such complex subjects, it can be instructive, and even fun, to go through a single-variable account of the history, to see what impact a single variable might have had, for instance, in this case, the currency valuations of the various nations: https://demodexio.substack.com/p/why-did-the-west-deindustrialize https://demodexio.substack.com/p/why-did-the-west-deindustri... Such single-variable explanations always need to be taken with a grain of salt, but they do provide a way into a subject, without demanding 10 years of study.
sgt101 4y ago
Amazing that the article can identify the causal factors that drove inflation during 1965-1982 - such as massive government funding to support a war, and then ignore the change in policy (end of war) that led to the moderation that followed. The USA (especially) and UK (just a bit) have just spent trillions on a war in Iraq and Afghanistan, everyone (I can't think of an exception) has spent trillions on a war against Covid-19. It's not surprising that there is now an inflationary surge. The solution is not to have more wars or pandemics. Unfortunately this is (to some degree) not a matter of choice for all parties. I don't think for a second that the timing of Putin's war suited the west, which is why Putin went in when he did. The timing of any war in Taiwan will not be chosen to suit all parties either. The war on terror was a matter of choice. History is revealing it to have been a very bad choice indeed. The next pandemic will not be a matter of choice either, whether it's man made or natural no one is going to wake up in the morning and say "wouldn't it be great if we had covid-3?" but if we get covid-3 we will have to react to it. For me this is the real lesson - one that Putin is learning as well. If a state is presented with the possibility of embarking on a war of choice there is no real choice. The only rational thing is to refuse to embark on that course because the risk of catastrophe is very high and the opportunity costs are higher.
lkrubner 4y ago
This article is missing a lot. For instance, it misses the international element completely. It does not mention one of the most important monetary facts of the 20th Century: that the USA dollar was allowed to float 1971. This was the end of the Bretton Woods system: https://www.bundesbank.de/en/tasks/topics/1973-the-end-of-bretton-woods-when-exchange-rates-learned-to-float-666280 https://www.bundesbank.de/en/tasks/topics/1973-the-end-of-br... The floating exchange rate helped the USA to hold on to manufacturing jobs, but caused inflation to go higher. This is a big fact to miss. "What the Great Inflation Taught Us" leans too much on accounts from Paul Volcker and Warren Buffet. It only shares the point of view of the market and investors. It does not include any point of view associated with manufacturing or labor. The essay doesn't mention the international context, the fact that inflation was often higher in other countries besides the USA. It doesn't attempt to explain some of the anomalies of the era, such as Japan, where inflation peaked at 26% despite the fact that Japan had a strengthening currency. The inflation of the era was international, and its beginning and end can only be understood in the international context. I made an attempt to look at this era from the point of view of the relationships between the developed and underdeveloped nations, and their currencies: https://demodexio.substack.com/p/why-did-the-west-deindustrialize https://demodexio.substack.com/p/why-did-the-west-deindustri...
- photochemsyn 4y ago
  Agreed. Also misses the global effect of the Arab oil embargo over US support for Israel in the 1973 war, which was amplified further by the rise of OPEC and the concommitant rise in international oil prices. This in turn caused a balance-of-payments problem, which in turn led to petrodollar recycling and the military-economic alliance between Gulf Arab states and the USA (and also, though this is largely forgotten, the Shah of Iran was a major player in that system before being deposed by the Iranian Revolution). Andrew Scott Cooper's The Oil Kings covers that in some detail: https://www.goodreads.com/book/show/12348743-the-oil-kings https://www.goodreads.com/book/show/12348743-the-oil-kings It's very relevant today as the spike in oil prices is fairly similar, and current US tensions with Saudi Arabia are not all that different from similar tensions with the Shah of Iran at the time. Additionally, I'm a bit skeptical about the author's claim that full employment is the number one cause of inflation.
photochemsyn 4y ago
Inflation in 1972 was fairly low, 3.4%. In 1974, inflation had jumped all the way to 12.3%. Hmmm... what major geopolitical event, with significant economic repercussions, occured in 1973? How about the Yom Kippur War, the U.S. military aid intervention on Israel's side, and the subsequent Gulf Arab oil embargo? https://en.wikipedia.org/wiki/1973_oil_crisis https://en.wikipedia.org/wiki/1973_oil_crisis > "By the end of the embargo in March 1974, the price of oil had risen nearly 300%, from US$3 per barrel to nearly $12 per barrel globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock"." The 1979 oil shock was caused by the steep drop in oil production in Iran, and was only partially mitigated by the petrodollar recycling system that US and Britain had set up with the Gulf Arab states in the latter half of the 1970s (initiated under President Ford's administration). It was later offset by the deepwater oil boom, in the North Sea and Gulf of Mexico, as well as by falling demand to the rise of more energy-efficint vehicles and energy-saving initiatives: https://en.wikipedia.org/wiki/1980s_oil_glut https://en.wikipedia.org/wiki/1980s_oil_glut By 1983, the inflation rate was back to 3.2%, which seems to match the notion that energy prices were the dominant inflationary factor over the 1972-1985 period. It's curious that the author of this piece entirely neglects this fundamental dynamic, instead claiming that it was due to a push for full employment (which is something of a neoliberal trope, i.e. it's an argument in favor of decreasing domestic US employment by shifting manufacturing overseas to sweatshop zones). Just look at the US unemployment rate - it dropped from 10.8% in 1982 (3.8% inflation) to 6.6% in 1986 (1.1% inflation).. i.e. Inflation plunged while employment boomed... doesn't that completely upset that argument? https://www.thebalancemoney.com/unemployment-rate-by-year-3305506 https://www.thebalancemoney.com/unemployment-rate-by-year-33...
hotdamnson 4y ago
What history can actually teach us is that things that never happened before happen all the time. This is so valid for anything related to global finance.
jmclnx 4y ago
Since they tag 1965 as the start, the miss the largest change in US monitory policy. Surprised no one mentions it. Before 1965, 10, 25 and 50 cent coins made in the US was 90% silver. In 1965 all coins changed to a base metal. So that alone caused prices to rise in the 1960s to early 70s, and all silver coins disappeared from circulation. As others mention, 1973 and the again 1978(?) the oil shock happened, which put inflation on steroids.
- AnimalMuppet 4y ago
  Nit: After 1965, half-dollar coins were 40% silver for a few years. And, not long after, the dollar was convertible to a fixed amount of gold, either. I forget the year for that change.
steve76 4y ago
RockyMcNuts 4y ago
- Nixon felt that tight Fed policy caused him to lose the 1960 election, he appointed Arthur Burns with instructions for loose policy, and whenever Burns was tighter than desired, he planted stories to pressure the Fed. - I wouldn't characterize Volcker as a 'lone hero', Carter appointed Volcker and Reagan reappointed him. there was political support for tight policies and fighting inflation. Volcker did a fantastic job maintaining that support and credibility with money supply targeting, and relaxing money supply targeting when it was leading to excessive tightness and overshooting. - The Phillips curve may not be wrong in that strong demand leads to acceleration in inflation, however it is hard to measure, and there is a distinction between the short-run tradeoff and a much steeper or vertical long-run tradeoff. You can temporarily get higher GDP by tolerating higher inflation, but then expectations adjust and you need more and more inflation for the same GDP boost. - there was a lot of weird stuff going on in the 70s with oil, farm prices, petrodollar recycling and emerging markets, loss of confidence in US leadership after Vietnam, extended dollar weakness. sometimes when it rains it pours, inflation expectations become self-fulfilling. - high and variable inflation is really bad for asset prices. it makes investing more risky. growth stocks like tech are bets about a farther away future, as opposed to present earnings, so it's worst of all for them. beta for stocks is kind of like duration for bonds, anything with a high multiple is a long-term bet on continued growth. - the Fed really wants to see slightly positive real rates, reasonable wage growth adjusted for productivity. otherwise they think they are behind the curve. with inflation this high, real wages are declining so that's bad for consumers and demand. and yet a Taylor rule means rates still need to go a lot higher, so that's why people think there's a risk Fed will overshoot and tip US into a recession. see also - https://www.federalreservehistory.org/essays/great-inflation https://www.federalreservehistory.org/essays/great-inflation - https://www.nber.org/books-and-chapters/great-inflation-rebirth-modern-central-banking https://www.nber.org/books-and-chapters/great-inflation-rebi... - https://www.nber.org/books-and-chapters/inflation-causes-and-effects https://www.nber.org/books-and-chapters/inflation-causes-and... - https://www.atlantafed.org/cqer/research/taylor-rule https://www.atlantafed.org/cqer/research/taylor-rule
naveen99 4y ago
A periodic commodity based competition to fiat currencies in the form of gold, oil, bitcoin, defi, dogecoin, USD, keeps the central bankers honest and makes them raise interest rates or pay out to the general public and not just the government sector.
SCAQTony 4y ago
In the 80's we began to export our jobs, unions, and our pollution to the third world. Then, technologic unemployment in the form of personal computers and software killed off not just jobs, but cities and towns, like Detroit MI, Youngstown OH, Buffalo, NY. I argue that what killed inflation was not the Federal Reserve but rather the erasure of the middle class.
jbverschoor 4y ago
So no talk about abandoning the gold standard, basically robbing everybody, and printing USD tokens?
lamontcg 4y ago
Yeah, I'm not so sure the Great Asset Bubble (1982-2022) was any better. Keeping inflation low keeps long rates low which keeps money cheap which blows up asset bubbles. We probably need closer to a 5% inflation target than a 2% inflation target. But very likely what will happen next is a massive recession and the Fed will once again cut rates to zero.

97 points by rock3m 4y ago

It's a weird choice to (1) pick 1965 as the starting date and (2) not discuss at all the fact that peak inflation followed the oil price shock of 1973.

readthenotes1 4y ago
1965 is when inflation started kicking in (we have a recording of a family dinner from around that time and the mother was complaining about inflation). It looks like there were three peaks in overall inflation mountain range, and only one of them was from the oil price shock. I believe the author might have been using the article she linked as a major source: https://www.federalreservehistory.org/essays/great-inflation https://www.federalreservehistory.org/essays/great-inflation
foobiekr 4y ago
1965 is a commonly picked start date because it is the worst time in the last 100+ years to retire with a self-funded portfolio. It’s commonly used in the FIRE community to check withdrawal plans.
- paulpauper 4y ago
  It depends on your individual consumption preferences. Just because the CPI is 7%/year does not mean you are losing 7%. If you have $1 million in cash and your expenses are $40k/year and CPI goes up 10%, then all you need is to invest the $960,000 in fixed income to negate the increase of $4k due to inflation, which is easily doable. If you are taking that $1 million and buying only energy or only food with it, then you would lose a lot of potential purchasing power but most people do not do that. Food and energy are only a small % of one's wealth beyond a certain amount.
  - terminalcommand 4y ago
    Another perspective, we have 83.45 %/year CPI inflation in Turkey. This is the official number an independent research group of academics claim it is nearing 200%. The official interest rate is 10.5%/year. You get maximum 20-25%/year interest on savings accounts. Real estate market and rents go up 220%/year (by the official numbers). Before doing FIRE purchase your own home or sign a really long term lease with upfront payment and no increases, inflation caused by corruption (as in my country's case) wreaks havoc on savings. It is simply not possible to invest in anything that can keep up with the inflation, you get poorer by the day.
    - reducesuffering 4y ago
      Yes, it is underappreciated in urban circles how much owning physical assets (land, reliable fuel-efficient vehicles, fruit trees, tools, wood for construction & heat) help weather rough times. They're very frequent in history, but a scant memory for many in the west. Digital IOU assets will not completely cut it.
      - bombcar 4y ago
        It’s a scenario that has happened many times in many countries, which means it can be studied and investigated. John T Reed wrote a book on it which has decent amount of research and ideas - https://johntreed.com/collections/john-t-reed-s-book-on-hyperinflation-and-depression/products/how-to-protect-your-life-savings-from-hyperinflation-and-depression https://johntreed.com/collections/john-t-reed-s-book-on-hype...
    - Rufbdbskrufb473 4y ago
      > It is simply not possible to invest in anything that can keep up with the inflation Why not just invest in diversified real estate rather than betting on a single property and its local market? In expectation, the returns should be similar on average but with lower volatility. I'd rather rent and put capital in a real estate investment fund. I guess something could be said for buying a property if you're very certain that you'll live there for the rest of your life, but if you would ever like to move, you'd be highly exposed to fluctuations in the value of a single asset, your home.

galaxyLogic 4y ago

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need more unemployment. We need economic hard time so that people will not have too much loose money any more. We need more unemployment so that employers don't have to pay bigger wages causing wage-inflation. To me this sounds counter-intuitive. How can the solution be more unemployment? People will then have even less money after paying the grocery and gas-bills.

nyokodo 4y ago
> People will then have even less money after paying the grocery and gas-bills. Precisely. The less money people have the lower prices have to go for sales to be possible so increased unemployment is a downward force on prices but isn’t all that successful right now when there’s also a massive skilled labor shortage in the vicinity of record expansions of the money supply.
- rightbyte 4y ago
  Instead of forcing some people into unemployment wouldn't raising taxes a little bit on everyone have the same effect?
  - happymellon 4y ago
    Yes, but the people who raise taxes are not the people who understand economics.
bfung 4y ago
> it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People are feeling good cause their companies are doing well, but wait… we should get a raise and get some of that profit! 4. see #1. At some point, this cycle gets out of control and we finally realize “inflation is too high”. For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand. You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations. The US Fed only has 1 tool out of the 3, as congress is the ones with power to raise taxes or add regulation.

xivzgrev 4y ago

Interesting article but she continually cites one source about her hero - Paul volcker himself. I would believe her premise that he broke inflation more if she included other sources, especially other financial leaders from the time.

ShamelessC 4y ago
There are several other financial leaders "of the time" quoted and summarized in the article.

Roark66 4y ago

Well, US having the dollar as a the world's reserve currency has it much better in general when it comes to inflation. Just look how Euro has been free falling. I've had an opportunity to observe inflation, followed by hyperinflation, then attempts to fight it with sky high interest rates bringing up massive unemployment and collapse of a lot of businesses. All this happened in the early 1990s in Poland freshly after the communist system went bankrupt and had no choice but to agree to transition to some form of market based economy(with lots of perks for old officials of course - that was the price of peace). It is interesting because back then the method used to fight the inflation was a list of interest rate hikes, followed by privatisation of a lot of state property that was sold for peanuts then liquidated(snapped very quickly by various people "with connections"). However, the tax burden was quite low (no VAT at the beginning, and the huge majority of businesses activity was in the "grey market" anyway). It took years and years for the situation to improve. Of course as with everything in economy there were many factors that led to the crash, not just interest rates. However, it is interesting to see how the current government is taking an opposite path to "fighting inflation". There are some interest rate hikes, but no where near what they should be to quash 20% inflation which we have now. Instead there are various attempts to "buy time". "One time" extra benefits for the pensioners have been quite generous. Laws to help borrowers by forcing 3 months of repayment holidays on mortgages were brought up. VAT for food was taken to 0%, taxes on fuel were lowered. A subsidy for house heating fuel was created, freeze of electricity prices for people and businesses that keep within certain usage limits, direct subsidies to high energy consuming industries. Of course all those things are available as tools, because the country went into this period of time with pretty good finances, but still it is very interesting to see if this "alternative" approach allows the relatively small peripheral economy survive this recession and keep its one of best in EU unemployment rates for long. Especially in light of having to double its military expenses and various expenses connected to the War.

lkrubner 4y ago

The big inflation spikes are always extremely multi-variate and difficult to turn into simple stories. Whereas ordinary inflation tends to be a somewhat simple story of demand running excess of supply, both of the big inflation spikes had large elements of supply side limitations. Indeed, possibly great inflation becomes "great" because it is the supply side problems riding on top of the normal demand pressures, and the two sometimes multiply each other in complex ways. The Great Inflation of 1965 to 1982 came in the second half of the era when the great European empires were coming to an end (1947-1986). The most obvious event of the Great Inflation is the OPEC crisis, which obviously would not have been possible if the MidEast had still been owned by Britain. The independence of the Third World was a necessary pre-condition for the Great Inflation. One possible angle to explore is the extent to which independence allowed the nations of the Third World to demand better prices for their goods -- obviously in the case of oil, but possibly in the case of many other commodities -- and then possibly the way to break the power of the Third World nations wanting better prices for their commodities was for the developed nations to inflict a brutal period of austerity on themselves, cheating themselves so as to cheat the commodity-supplying nations. This was an era in which the number of nations increased, dramatically, as the world transformed from a few big empires to 212 independent nations. Therefore, there was also a dramatic increase in the number of currencies that existed in the world. And so, there is another avenue of research that needs more exploration: whether the increase in the number of currencies that existed in the world lead to a kind of chaotic interference in the markets for currencies -- a world with just 11 currencies is a world where one can almost model the interactions in one's head, whereas a world with 212 currencies is far too complex for anyone to model it in their head. Did the sudden increase in the total number of independent currencies make it difficult, even temporarily, for the markets to send a rational signal about the value of those currencies? Given such a complex situation, it is almost impossible to develop a properly multi-variate model, unless one is willing to devote one's life to the study of the subject, but as a method of getting traction on such complex subjects, it can be instructive, and even fun, to go through a single-variable account of the history, to see what impact a single variable might have had, for instance, in this case, the currency valuations of the various nations: https://demodexio.substack.com/p/why-did-the-west-deindustrialize https://demodexio.substack.com/p/why-did-the-west-deindustri... Such single-variable explanations always need to be taken with a grain of salt, but they do provide a way into a subject, without demanding 10 years of study.

sgt101 4y ago

Amazing that the article can identify the causal factors that drove inflation during 1965-1982 - such as massive government funding to support a war, and then ignore the change in policy (end of war) that led to the moderation that followed. The USA (especially) and UK (just a bit) have just spent trillions on a war in Iraq and Afghanistan, everyone (I can't think of an exception) has spent trillions on a war against Covid-19. It's not surprising that there is now an inflationary surge. The solution is not to have more wars or pandemics. Unfortunately this is (to some degree) not a matter of choice for all parties. I don't think for a second that the timing of Putin's war suited the west, which is why Putin went in when he did. The timing of any war in Taiwan will not be chosen to suit all parties either. The war on terror was a matter of choice. History is revealing it to have been a very bad choice indeed. The next pandemic will not be a matter of choice either, whether it's man made or natural no one is going to wake up in the morning and say "wouldn't it be great if we had covid-3?" but if we get covid-3 we will have to react to it. For me this is the real lesson - one that Putin is learning as well. If a state is presented with the possibility of embarking on a war of choice there is no real choice. The only rational thing is to refuse to embark on that course because the risk of catastrophe is very high and the opportunity costs are higher.

lkrubner 4y ago

This article is missing a lot. For instance, it misses the international element completely. It does not mention one of the most important monetary facts of the 20th Century: that the USA dollar was allowed to float 1971. This was the end of the Bretton Woods system: https://www.bundesbank.de/en/tasks/topics/1973-the-end-of-bretton-woods-when-exchange-rates-learned-to-float-666280 https://www.bundesbank.de/en/tasks/topics/1973-the-end-of-br... The floating exchange rate helped the USA to hold on to manufacturing jobs, but caused inflation to go higher. This is a big fact to miss. "What the Great Inflation Taught Us" leans too much on accounts from Paul Volcker and Warren Buffet. It only shares the point of view of the market and investors. It does not include any point of view associated with manufacturing or labor. The essay doesn't mention the international context, the fact that inflation was often higher in other countries besides the USA. It doesn't attempt to explain some of the anomalies of the era, such as Japan, where inflation peaked at 26% despite the fact that Japan had a strengthening currency. The inflation of the era was international, and its beginning and end can only be understood in the international context. I made an attempt to look at this era from the point of view of the relationships between the developed and underdeveloped nations, and their currencies: https://demodexio.substack.com/p/why-did-the-west-deindustrialize https://demodexio.substack.com/p/why-did-the-west-deindustri...

photochemsyn 4y ago
Agreed. Also misses the global effect of the Arab oil embargo over US support for Israel in the 1973 war, which was amplified further by the rise of OPEC and the concommitant rise in international oil prices. This in turn caused a balance-of-payments problem, which in turn led to petrodollar recycling and the military-economic alliance between Gulf Arab states and the USA (and also, though this is largely forgotten, the Shah of Iran was a major player in that system before being deposed by the Iranian Revolution). Andrew Scott Cooper's The Oil Kings covers that in some detail: https://www.goodreads.com/book/show/12348743-the-oil-kings https://www.goodreads.com/book/show/12348743-the-oil-kings It's very relevant today as the spike in oil prices is fairly similar, and current US tensions with Saudi Arabia are not all that different from similar tensions with the Shah of Iran at the time. Additionally, I'm a bit skeptical about the author's claim that full employment is the number one cause of inflation.

photochemsyn 4y ago

Inflation in 1972 was fairly low, 3.4%. In 1974, inflation had jumped all the way to 12.3%. Hmmm... what major geopolitical event, with significant economic repercussions, occured in 1973? How about the Yom Kippur War, the U.S. military aid intervention on Israel's side, and the subsequent Gulf Arab oil embargo? https://en.wikipedia.org/wiki/1973_oil_crisis https://en.wikipedia.org/wiki/1973_oil_crisis > "By the end of the embargo in March 1974, the price of oil had risen nearly 300%, from US$3 per barrel to nearly $12 per barrel globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock"." The 1979 oil shock was caused by the steep drop in oil production in Iran, and was only partially mitigated by the petrodollar recycling system that US and Britain had set up with the Gulf Arab states in the latter half of the 1970s (initiated under President Ford's administration). It was later offset by the deepwater oil boom, in the North Sea and Gulf of Mexico, as well as by falling demand to the rise of more energy-efficint vehicles and energy-saving initiatives: https://en.wikipedia.org/wiki/1980s_oil_glut https://en.wikipedia.org/wiki/1980s_oil_glut By 1983, the inflation rate was back to 3.2%, which seems to match the notion that energy prices were the dominant inflationary factor over the 1972-1985 period. It's curious that the author of this piece entirely neglects this fundamental dynamic, instead claiming that it was due to a push for full employment (which is something of a neoliberal trope, i.e. it's an argument in favor of decreasing domestic US employment by shifting manufacturing overseas to sweatshop zones). Just look at the US unemployment rate - it dropped from 10.8% in 1982 (3.8% inflation) to 6.6% in 1986 (1.1% inflation).. i.e. Inflation plunged while employment boomed... doesn't that completely upset that argument? https://www.thebalancemoney.com/unemployment-rate-by-year-3305506 https://www.thebalancemoney.com/unemployment-rate-by-year-33...

hotdamnson 4y ago

What history can actually teach us is that things that never happened before happen all the time. This is so valid for anything related to global finance.

jmclnx 4y ago

Since they tag 1965 as the start, the miss the largest change in US monitory policy. Surprised no one mentions it. Before 1965, 10, 25 and 50 cent coins made in the US was 90% silver. In 1965 all coins changed to a base metal. So that alone caused prices to rise in the 1960s to early 70s, and all silver coins disappeared from circulation. As others mention, 1973 and the again 1978(?) the oil shock happened, which put inflation on steroids.

AnimalMuppet 4y ago
Nit: After 1965, half-dollar coins were 40% silver for a few years. And, not long after, the dollar was convertible to a fixed amount of gold, either. I forget the year for that change.

steve76 4y ago

RockyMcNuts 4y ago

- Nixon felt that tight Fed policy caused him to lose the 1960 election, he appointed Arthur Burns with instructions for loose policy, and whenever Burns was tighter than desired, he planted stories to pressure the Fed. - I wouldn't characterize Volcker as a 'lone hero', Carter appointed Volcker and Reagan reappointed him. there was political support for tight policies and fighting inflation. Volcker did a fantastic job maintaining that support and credibility with money supply targeting, and relaxing money supply targeting when it was leading to excessive tightness and overshooting. - The Phillips curve may not be wrong in that strong demand leads to acceleration in inflation, however it is hard to measure, and there is a distinction between the short-run tradeoff and a much steeper or vertical long-run tradeoff. You can temporarily get higher GDP by tolerating higher inflation, but then expectations adjust and you need more and more inflation for the same GDP boost. - there was a lot of weird stuff going on in the 70s with oil, farm prices, petrodollar recycling and emerging markets, loss of confidence in US leadership after Vietnam, extended dollar weakness. sometimes when it rains it pours, inflation expectations become self-fulfilling. - high and variable inflation is really bad for asset prices. it makes investing more risky. growth stocks like tech are bets about a farther away future, as opposed to present earnings, so it's worst of all for them. beta for stocks is kind of like duration for bonds, anything with a high multiple is a long-term bet on continued growth. - the Fed really wants to see slightly positive real rates, reasonable wage growth adjusted for productivity. otherwise they think they are behind the curve. with inflation this high, real wages are declining so that's bad for consumers and demand. and yet a Taylor rule means rates still need to go a lot higher, so that's why people think there's a risk Fed will overshoot and tip US into a recession. see also - https://www.federalreservehistory.org/essays/great-inflation https://www.federalreservehistory.org/essays/great-inflation - https://www.nber.org/books-and-chapters/great-inflation-rebirth-modern-central-banking https://www.nber.org/books-and-chapters/great-inflation-rebi... - https://www.nber.org/books-and-chapters/inflation-causes-and-effects https://www.nber.org/books-and-chapters/inflation-causes-and... - https://www.atlantafed.org/cqer/research/taylor-rule https://www.atlantafed.org/cqer/research/taylor-rule

naveen99 4y ago

A periodic commodity based competition to fiat currencies in the form of gold, oil, bitcoin, defi, dogecoin, USD, keeps the central bankers honest and makes them raise interest rates or pay out to the general public and not just the government sector.

SCAQTony 4y ago

In the 80's we began to export our jobs, unions, and our pollution to the third world. Then, technologic unemployment in the form of personal computers and software killed off not just jobs, but cities and towns, like Detroit MI, Youngstown OH, Buffalo, NY. I argue that what killed inflation was not the Federal Reserve but rather the erasure of the middle class.

jbverschoor 4y ago

So no talk about abandoning the gold standard, basically robbing everybody, and printing USD tokens?

lamontcg 4y ago

Yeah, I'm not so sure the Great Asset Bubble (1982-2022) was any better. Keeping inflation low keeps long rates low which keeps money cheap which blows up asset bubbles. We probably need closer to a 5% inflation target than a 2% inflation target. But very likely what will happen next is a massive recession and the Fed will once again cut rates to zero.