23 Skidoo

Is this a rerun of the 70's and 80's?
Most seem to think so as the word on everyone's mind is "stagflation".
In Flationed Out I dismissed stagflation from an Austrian perspective but let's look at things from a then vs. now perspective to see what the similarities and differences are.

This is a practical exercise as opposed to a monetary exercise.

Similarities

1. War in Vietnam war then vs. the war in Iraq now
2. Rising oil and commodity prices
3. Fed trying to crush inflation
4. Rising interest rates
5. Oil shock
6. Social mood
   

Puplava made a case for similarities in Historical Rhythms and perhaps you can find some items to add to that list.

Differences

1. Spiraling wages then vs. declining wages now
2. Wage and price controls
3. Debt levels
4. Housing down payments
5. Two family incomes
6. The power of unions
7. Pricing power of manufacturers
8. Globalization
9. Outsourcing
10. Productivity
11. The internet
12. Wealth concentration
13. Fighting the last war
14. Oil shock
15. Declining credit standards
16. Downfall of communism

Rising commodity prices and a "guns and butter economy" are of course the most common parallels. Unfortunately most seem to stop right there and say "Yes, this is a rerun" without even bothering to look for differences. The differences noted above are staggering.

Are there any threats of "wage controls"? How many times did Snow tell us that rising wages were just around the corner? Flashback: My first job out of college was as a computer programmer for Chicago Title followed by another job at Harris Bank. Ten percent raises back then were common. Tack on another six percent for promotions. Seriously when was the last time "common folk" got a 16% raise?

In the seventies it took a single wage earner to support the family. If that person lost his or her job the other could get a temporary job and hope to make up some of the difference. Now both partners work and if EITHER of them has a problem (loss of income) there are enormous implications.

In the seventies you had to put 20% down on a house and prove where you got that down payment. Now you can put down a negative 15% (borrowing the down payment and then more to furnish the place) with few problems.

Unions in the seventies had enormous power compared to today. Defined benefit plans were the standard then. GM, FORD, IBM, CAT, and others are doing everything in their power now to scrap them.

Was there an internet in the seventies? How about global wage arbitrage? How about outsourcing manufacturing? How about outsourcing R&D? How about shipping X-rays over the internet to India for diagnosis for treatment to take place in the US?

What about productivity? China is now actually losing manufacturing jobs because of increased productivity.

Yes we had an oil shock in the seventies. That oil shock was caused by an embargo. The oil shock now is caused by peak oil. Is there a difference? Yes there is: In the former wages rose to meet rising costs. Are wages rising now because of peak oil? I think not. That is why I have "oil shock" in both columns.

The downfall of communism is an interesting item. We pressured Russia and China and other place to "do as we do" and support the freedom of capitalism. How odd is it that we are fighting more with China than ever before since they have embarked on free market policies? Yes we get cheap goods, but the result is we lose jobs. No longer can the US get the best of both worlds and we simply do not like that fact. Like it or not, outsourcing has NOT come to its logical conclusion. That means pressures on wages we did not see in the seventies will remain in play for quite some time.

The Gold Standard

Quite simply I do not know how to categorize this one. Yet I feel it is extremely important. Of course I am talking about the Gold Standard.

It was not the gold standard that was removed by Nixon, rather it was the 'gold exchange standard'. Only foreign central banks were allowed to demand gold for their dollars. In exchange they all agreed to keep dollars as their main reserve asset and agreed to the IMF rule that forbade IMF member nations to introduce a gold standard. This leads us to an important difference for US citizens. In the first half of the 70's owning gold was illegal for private citizens of the US (one of the worst scandals that remained as a legacy of FDR, aside from the welfare/warfare state).

The 'closing of the 'gold window' was a major factor in destroying the dollar's credibility in the period, thus dollar based prices (and eventually prices in all other fiat currencies) began a sharp rise, so oil was subject to a double whammy if you will. As of now, private citizens can at least guard against the coming debacle by owning gold outright.

Inflation Targeting

BC on Silicon Investor had these thoughts as well as a question that I want to share:

The trouble with targeting inflation or price levels with interest rates is that interest rates shift both aggregate demand and aggregate supply in the same direction simultaneously. Lower interest rates stimulate demand by increasing debt-based consumption, but they also stimulate supply by encouraging investment. Higher rates stifle demand, but also supply by cutting back on investment in factories and equipment.

Perhaps this is obvious, but for some reason I never see it stated. If one wants to control prices, one needs a lever that shifts one or the other, not both. The real problem with this present system is in guessing which factor of price is going to dominate. I guess you could tie it into Kondratieff here. In the first three K-seasons, debt is low enough that the demand-side pull on pricing dominates. Lower rates result in higher prices and higher rates in lower prices. However, when debt levels become unsustainably high and K-winter takes over, demand becomes relatively inelastic and unresponsive to shifts in interest rates. However, supply still responds via increased investment when rates are lowered. So, lower interest rates no longer support higher prices in K-winter. In fact, they make prices decline by boosting supply in the face of inelastic aggregate demand.

Why am I so alone in seeing this? Shouldn't the PhDs spending their days pondering this stuff have come to this conclusion long ago?

BC

23 Skidoo

BC that was a very good point, but all you are really doing is stating in a roundabout way that the Fed is forever chasing its own tail. The Fed can NEVER reach the natural interest rate as its rate manipulation itself constantly shifts this natural level. The lagging effect of their actions ensures they will miss the obvious.

You are not the first with this idea. However, what is new is the attempt to tie this into the K-cycle. As much as I am in favor of those cycles, the evidence suggests that K-cycles are NOT 'natural events' but rather very long term cycles created by interventionism of the Fed and governments. In short, inflationist policies work until they blow sky high. That time is here which of course means that everyone playing "That seventies show" reruns is going to instead see a rerun of the "23 skidoo small change" scenario.

Please remember the Fed always fights to the death the last major battle. The battle they should be fighting is the one before the last. The last major battle was against inflation in the seventies and eighties. Fighting the last minor battle (against deflation) in 2003 created the largest property bubble in the history of mankind as a result. It also sealed the Fed’s fate. What we see now is more like 1929 than 1979 and the differences noted above prove it.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/