Inflation is back in the news
Reflections on the 1970's
There were some very good things about the 1970’s. The NY Knicks won two NBA championships with one of their all-time great rosters, including my boyhood hero Bill Bradley. Some of the best rock music ever written came out of the 1970’s, including some of my favorite Crosby Stills Nash & Young songs. And I spent four wonderful years at W&M, where the Grateful Dead and Bruce Springsteen both played W&M Hall, Jimmy Carter met Gerald Ford in the 1976 presidential debates at old PBK Hall, and where I met my wife-to-be on our first day of freshman orientation at a party in Yates Hall, which was a dump even back then. This was also the decade when the Tribe (then the Indians) beat the UNC Tar Heels in one of hoops history’s great upsets. You can read about the game here: W&M Defeats UNC Tar Heels, December 1977:https://www.dailypress.com/news/dp-xpm-20021207-2002-12-07-0212070053-story.html
But there were also some truly horrific things about the 1970’s: the continuation of the Vietnam War following Richard Nixons’ electoral victories in 1968 and 1972; the killing of four college students by National Guard troops at Kent State University in May 1970; ; the near bankruptcy of NY City in the mid-70’s; and the Iran hostage crisis which began in November 1979 (see the film Argo if you haven’t already).
For a sense of the cultural scene on (some) college campuses in the early 1970’s, check out this video of Crosby Stills Nash & Young’s song about the Kent State massacre, Ohio:
And while I said that the 1970’s were a great decade for rock music, not all of the music was great. The 1970’s also saw the advent of disco, celebrated in the film Saturday Night Fever. You can watch this clip and make your own assessment:
From an economic perspective, the 1970’s were largely a lost decade. In the US we had both double digit unemployment and double digit inflation at the same time (so called “stagflation”). Unemployment during the 1970s peaked at over 10% with annual inflation running at 15%. The inflation was in part a result of massive federal government deficit spending on the Vietnam War during the late 1960’s and early 1970’s. But we also had two big “supply shocks” in the oil markets, one in 1973-4 when OPEC imposed its oil embargo on the US and other nations perceived as supportive of Israel during the Yom Kippur war and another in 1979 following the Iranian revolution.
When I first studied macro-economics in college with the wonderful Professor Schiffrin (RIP), we learned about the so-called Phillips Curve, which illustrated the trade-off between inflation and unemployment (high inflation, low unemployment and vice versa). This inverse relationship between inflation and unemployment was easy to visualize theoretically in the classroom, but it was much less evident empirically in the real world of the 1970’s US economy.
Suffice it say that inflation was a major economic problem during the 1970s. The Nixon administration attempted just about everything they could think of to put an end to rising inflation and inflation expectations, including disastrous wage and price controls (very un-Republican), which mostly resulted in long gas lines and irate motorists. You will recall that President Nixon resigned in disgrace in August of 1974, following Congressional investigations into the Watergate scandal, which seems like a big nothing burger by today’s standards. (How quaint for the President to resign in disgrace for illegal activity while in office.) Of course this was also after Nixon’s VP Spiro Agnew had also been forced to resign after being caught taking cash bribes in the east wing of the White House.
Those of you who weren’t around in 1974 may want to watch Richard Nixon’s resignation speech, which was a truly historic moment. You can find it here:
Nixon’s successor Gerald Ford tried a different approach to tackling inflation, launching a nationwide PR campaign to “whip inflation now”, featuring WIN buttons which you can still buy on eBay for about $10. President Ford took office at a difficult time in our nation’s history and while he had some positive impact in restoring a much needed sense of normalcy and legitimacy to our government, and toning down some of the culture war excesses that raged earlier in the decade, he wasn’t terribly effective in fighting the war on inflation. I guess this is not surprising if he thought WIN buttons would do the trick.
But it wasn’t until Paul Volcker was named Fed chair by President Carter in August 1979 that the US finally began to take serious action to attack inflation and inflation expectations, at the cost of sky high interest rates (above 15%) and two very nasty recessions in the early 1980’s, which the new Reagan administration did not find amusing. If you don’t know much about Paul Volcker and his time as Fed chair, you should. You can read Paul Volcker’s NY Times obituary here: https://www.nytimes.com/2019/12/09/business/paul-a-volcker-dead.html
Those of you who follow the financial press will know that inflation is again a hot topic, for the first time in 15-years or so. Annual consumer price inflation has been running well below 2% since the 2008 financial crisis, but recently hit 5% (annualized) in May of this year. The release of the May CPI report got the immediate attention of the financial press, with some commentators asking whether we may be heading into a period of runaway inflation similar to what we experienced in the 1970’s. You can read the May CPI report here: https://www.bls.gov/news.release/pdf/cpi.pdf
As of now the capital markets don’t seem too fussed about this, with interest rates remaining near historic lows with the help of very loose Fed monetary policy. The 2-year UST yield is at 0.28%, the 5-year is at 0.92% and the 10-year at 1.52%. But there are signs of increasing inflation expectations in the capital markets. The 5-year breakeven inflation rate (the differential between 5-year nominal UST yields and 5-year US TIPS yields) has increased quite a bit over the past 15 months, from 0.3% in March 2020 to its recent high of 2.7% in May 2021. But the 5-year breakeven rate is now back under 2.5% and is essentially unchanged since the May CPI report was issued on June 10th.
Even thought interest rates have not moved much recently, and the increase in breakeven rates since March 2020 appears to have paused, it is probably true that the capital markets are on high alert for further signs of rising inflation and are very interested in how the Fed will respond, so watch this space for more news.
I have very little else to add to the current inflation debate. But I do think it is important that we all try to retain some sense of historical perspective before we get our collective knickers in a twist about the possible reemergence of “non-transitory” inflation (that’s Fedspeak) reminiscent of the 1970’s. For some good historical perspective on inflation in the 1970s, I encourage you to watch this recent video from the WSJ and to keep your eyes out for more reporting on this very current topic: WSJ, Inflation Lessons from the 1970’s: https://www.wsj.com/video/what-the-inflation-of-the-1970s-can-teach-us-today/760A9529-5532-4103-9B70-75C942F5F297.html?mod=hp_lead_pos5
And for a deeper dive into some of the historical inflation data, check out these links:
FRED inflation data: https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
FRED breakeven inflation rates: https://fred.stlouisfed.org/series/T5YIE