Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Fed Interest Rate Meeting: The Long-Lasting Costs of Inflation

Economics / Inflation Jun 24, 2008 - 01:42 PM GMT

By: Adrian_Ash

Economics

"...The true cost of beating inflation vs. the cost of letting it run..."

"AT THE SURFACE LEVEL" , explains Bradford De Long in a decade-old paper , the destruction of money during the 1970s happened because no one in power "placed a high enough priority on stopping inflation."


The three '70s presidents – Nixon, Ford and then Carter – all inherited "painful dilemmas with no attractive choices". The forlorn hope of trying to grow jobs at the expense of sound money had long since locked in that problem the previous decade.

What's more, "no one had a mandate to do what was necessary," our Berkeley professor goes on. "It took the entire decade for the Federal Reserve as an institution to gain the power and freedom of action necessary to control inflation."

But at the very deepest level, "the truest cause of the 1970s inflation was the shadow cast by the Great Depression of the 1930s," De Long concludes.

"It took the 1970s to persuade economists, and policy makers...that the political costs of even high single-digit inflation were very high."

How high were the political costs of seven, eight and nine per cent annual inflation? Amid fuel shortages and the energy-price crisis of 1979-80, the inflationary bubble ended with Jimmy Carter's complete rout at the polls, plus all-out strikes over wage claims right across Europe .

Here in Britain , the socialist Labour government collapsed thanks not to the state's near-bankruptcy and IMF bail out of 1976, but during the "Winter of Discontent" of 1979 when grave-diggers and rubbish collectors went on strike for more pay.

It took four elections and 17 years before UK voters let Labour take power again. The trades unions' role in apparently stoking inflation – by demanding near-inflationary pay rises – gave the Thatcher administration a mandate to destroy them almost entirely.

And investors? "Stock prices declined in real terms by three quarters between 1966 and 1982," notes Martin Hutchinson at PrudentBear . US Treasury bonds became known as "certificates of confiscation" as their annual returns – paid in fast-depreciating currency – fell far below the rate of inflation. Real estate values just about kept level with prices. Cash savers and fixed-income retirees were pretty much eaten alive.

Put another way, the developed world of the early 1970s preferred to let inflation run wild because few people guessed what a mess it would cause – neither for workers, business or capital investors.

A little inflation never hurt anyone, after all. Least of all politicians looking for re-election during a boom in the credit cycle! And so the great and the good balked at their chance to act early. Because they didn't dare "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," as US Treasury secretary Andrew Mellon famously cried in the '30s.

Let's face it; destroying wage-earners, equity markets and real estate will never be much of a vote-winner. Not least with a peanut-farmer sat in the White House.

So instead, interest rates remained beneath growth in inflation, trying to juice the economy and side-step a slowdown. Price controls were imposed, ripping off manufacturers and also rigging the inflation figures applied to new wage claims. And cash savers – meaning anyone who didn't spend all they got on the first of the month – got awfully twitchy about the value of money.

The root cause of inflation – too much credit and cash chasing itself – was only addressed when consumers and business were hurt so badly, fixing the problem finally grew urgent.

Even the Federal Reserve and US Treasury caught on in the end, noting how the rush to Buy Gold was merely "a symptom of growing concern about world-wide inflation." People just wanted to get some kind of foothold as the value of money collapsed in a landslide. Whether investors, laborers or land-owners, no one could ignore what was happening to prices – and what was happening to prices started and ended with money.

As Jürgen Stark – a member of the European Central Bank (ECB) – noted of Germany's early 20th century hyperinflations in a speech last week , "a strong coalition supported an open inflation aimed at real debt relief...But the long lasting costs of such a policy [were] the destruction of people's trust and confidence in their currency."

Whereas today? "I know that many believe it is somehow sinful or immoral for the Fed to hold [interest] rates so low as to render the real return on cash to be negative," writes Paul McCulley in his latest Central Bank Focus for Pimco , the world's biggest bond fund. "[But] I don't buy this proposition."

Pointing to the chasm between unionized labor's power in the 1970s and today's sub-inflationary pay claims, McCulley asks why cash savers – those folk providing investment capital through their bank deposits – shouldn't suffer as well.

"Why should it be that those who only have labor to offer to the market should not be made whole [amid rising inflation] while those with cash should be made whole? If indexing to headline inflation is inappropriate for labor wages and capital's profits, why should cash yields be indexed by the Fed?"

Why indeed? Sacrifice enough cash savers along with non-unionized labor, in fact, and maybe this sweet little inflation can just keep running for ever. No pain, no costs! Other than the destruction of trust and confidence in currency. Which might just prove expensive long-term.

The value of money directly relates to its price. Sub-zero returns, Paul McCulley forgets, will only force investors to Buy Gold as businesses fold and wage-earners lose out.

Those who buy early might at least get ahead.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules