Inflation then and now?

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Inflation then and now?

Post by Sinsji »

A few quotes from the following article reminded me that I don't really understand this whole quantitative easing thing. ... lation.asp

The title is "How the Great Inflation of the 1970s Happened"

Quote 1:
"The easy-money policies of the American central bank, which were designed to generate full employment by the early 1970s also caused high inflation."

Quote 2:
"For interest-sensitive industries, such as housing and cars, rising interest rates cause a calamity. With interest rates skyrocketing, many people are priced out of new cars and homes."

Quote 3:
"However, it is clear that monetary policies, which financed massive budget deficits and were supported by political leaders, were the cause. This mess was proof of what Milton Friedman said in his book "Money Mischief: Episodes in Monetary History", inflation is always "a monetary phenomenon."

Question 1:
Is history repeating itself at the moment regarding fiscal policy from central banks? Now with loose monetary policy compared to the seventies before inflation kicked in.

Question 2:
As an amateur economist it feels like bankers flush the financial system with money, only looking at the current inflation numbers. How good are they at predicting future inflation?

Question 3:
Who did well during the period of rising inflation in the seventies, besides the people investing in Berkshire and/or discovering Vanguard?
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Re: Inflation then and now?

Post by alex_686 »

2 points.

First, the increase in inflation had more to do with the oil embargo / oil shock then with the Fed’s mandate of full employment.

Second, things have changed and the old theories may not hold. I would point to Japan and the past 20 years plus QE. Under traditional theories inflation should have increased, but it has not. There are some great debates here, but no consensus.
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Re: Inflation then and now?

Post by deikel »

- The quantitative easing was not done in a simple print more money and distribute it was done as a backup to banks so they could spend already circulating money (M1 vs M2 ect) - so it might be a lot less direct then you would expect ?

- Money has become much more mobile then the 70s, so increasing it in one country or region might only effect the total amount of money circulating the globe so much ?

- People with debt do very well in an Inflation period - all the more likely that states will eventually like to see inflation so they can shed their debt load...something our current leadership seems not to fact I strongly believe there will be a political incentive to have higher inflation very, very soon - the current Fed move not withstanding

- employment and inflation seems a whole lot less interconnected lately then you would expect - maybe a sign of a lower required labor at a booming economy (I don't want to call it automation/robotics - but it goes in that direction)

If you want to win an assumed period of inflation, you leverage all assets, borrow money before the inflation period and at low rates, invest during the period and enjoy high returns and let the inflation devalue your debt....need the right market timing though...and quite some guts.
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Re: Inflation then and now?

Post by SimpleGift »

A few reasons why, unlike the 1970s, inflation has remained low despite massive monetary expansion:
  • 1. Most of the new money has not entered the economy. The majority of the Fed's monetary expansion has remained in the Fed's district banks, rather than reaching consumers.

    2. The global economy is weak. Overall demand is muted, which places downward pressure on inflation.

    3. The real (inflation adjusted) price of crude oil is much lower than the 1970s — due mostly to a weaker global economy.
Inflation should thus not be much of a threat until world economic growth greatly improves.
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Re: Inflation then and now?

Post by Wakefield1 »

I believe when a Federal official says that inflation is too low that the danger and corrosive nature of inflation is being underestimated. As well as the difficulty and pain involved with trying to slow it when it has gotten high and the expectation for continuing inflation has permeated comsumers' and business leaders' thinking.
I do not believe that inflation is "low" and I certainly don't think it is "too low".

My best guess as to the cause of the great inflation of the Nixon years is that the Johnson administration tried to sustain the Viet Nam War and Johnson's social programs without being able to properly pay for them.
(I might have picked up that idea from reading Barbara Tuchman)
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Re: Inflation then and now?

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