Any clue in '70s inflation?

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March 25, 2011

SouthAmerica: Preview of what is around the corner: Inflation

I was looking for Michael Harrington's book on Inflation when I found this program about Inflation – he is one of the people interviewed on this TV program.


28 episodes shown on PBS in 1985

Part 7 of 28

Inflation: This program examines the economic and social costs of the inflationary spiral of the early 1960s and questions whether the problem of inflation has been solved.


Inflation: How Did the Spiral Begin?
http://www.learner.org/vod/vod_window.html?pid=344


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Any clue in '70s inflation?
http://www.elitetrader.com/vb/showthread.php?s=&postid=2257314#post2257314

February 19, 2007

SouthAmerica: Reply to Hydroblunt

In the mid 1970’s when I was in college I did read a very interesting book that gave me a detailed analysis of the roots of the economic mess that the US found itself in the 1970’s – the name of the book was “Inflation” by Michael Harrington. He also wrote a number of other books, but the book that made him famous was “The Other American.”

I was an undergraduate economics student at that time and Michael Harrington’s book made a lot of sense to me. The root of the problem of the inflation of the 1970’s was in the massive US defense spending going back to the mid 1960’s because of the Vietnam War.

Massive defense spending generates inflation in future years.

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The root cause of inflation is always Fed policy or bank credit expansion. Even if you have an 'oil shock' and suddenly a lot more of your income is going to buy one thing, in an equilibrium system you have to cut back elsewhere - unless the whole money+credit supply is being inflated to mask the effect, which is what always happens in our system. Inflation is always more popular than deflationary recessions.

It's the same thing that happened in the 2000s. The difference seems to be that in the days before globalization and financialization, currency debasement fed directly into domestic wages and CPI whereas now we see the effect in asset speculation (both here and abroad), distorted global commodity prices, and to an extent 'exported' inflation overseas e.g. in China - first showing up in producer prices but now starting to filter through into wages and consumer prices.

As with everything else there's a psychology component in terms of exactly how and on what timeframe people respond to monetary actions. Really makes you nervous though as to the eventual consequences of ZIRP, QE, extended massive deficits etc. - the Fed has no better idea than we do as to how it will play out. Recall that prior to the 70s, stagflation was thought to be impossible. Whatever happens this time will catch the congnoscenti equally by surprise. Add that the hyper-complex interconnected nature of the global economy and capital pools will make it much harder to trace the exact chain of causality, and seems to increase the risk of catastrophic black swans.
 
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