A blast from the past


Last month’s article on inflation garnered a lot of interest in the form of media interviews, a few phone calls, and even a presentation to the American Farm Bureau board. The concern is justified, especially in production agriculture. Some of us remember the high inflation rate of the 1970s and the cost of fixing the problem – long-term interest rates above 15%, collapsing land prices, soaring the dollar. due to rising interest rates and collapse in agricultural exports. The farm debt crisis brought the entire farm credit system to its knees. Many rural agricultural banks have closed shop. It was a scary time. No one wants to go back.

This is the first in a short series of articles on the inflationary period of the 1970s and the actions of the Federal Reserve to deal with long-term embedded inflation. Words like “stagflation” will come into play.

Before we go much further, let’s recognize that one of the driving forces behind the recent surge in prices is simple arithmetic. Global prices – All-Urban Consumer Price Index – fell by 2.4% on an annual basis in March 2020 and by 8.4% at an annualized rate in April 2020. Therefore, remaining stable in March and April would be a problem. marked change from the early stages of the pandemic. Add to that a global economic recovery with stimulus measures as well and …

Monthly data is noisy. Think of yield monitors as you move through a field or individual cattle weights instead of a full pen. As we went through COVID-19, even though we had daily case data, the information was reported on average over seven days. So pay attention to monthly data, but don’t get overwhelmed by one or two data points.

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To talk about inflation in the 1970s, we have to go back to the end of the 1960s. President Johnson at the time, with his Great Society and his spending on the Vietnam War, considerably stimulated the global economy. Nixon was elected in 1968 and brought with him many changes in economic policy. He sacked William Martin as chairman of the Federal Reserve and appointed Arthur Burns. Burns has been pressured to keep interest rates low and stimulate the economy. In 1971, Nixon also made the connection between gold and the dollar, allowing the dollar to float freely in world markets. As a result, the dollar weakened against many major currencies. A lower dollar value makes imported goods more expensive in dollar terms.

And then we have to talk about oil prices. Between 1970 and 1973, the price of a barrel of oil rose from $ 3.18 to $ 3.89. In 1974, it rose to $ 6.87 per barrel. Pretty cheap by today’s terms, but that was a 77% jump in one year. Oil prices hit $ 12.64 per barrel at the end of the decade.

People have developed expectations during this era of high inflation and have incorporated those expectations into wage and salary demands. Our apologies for the quality of the graph below, taken from a 1976 Bureau of Labor Statistics report. Note the change in slope of the curve from around 1970 onwards. This increase in wage rate growth shows not only a one-time increase in pay, but long-term gains. When the whole economy spends five and six years with faster wage growth than the previous one, inflation expectations become widespread.

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We are emerging from the pandemic with job growth and anecdotal evidence of rising wage rates. Yet a week has not gone by without some articles reporting that companies are failing to find staff, even when they offer more than $ 15 an hour for entry-level positions.

We have already discussed the various oil crises that hit during the 1970s. The United States used 63.5 quadrillion BTU of fossil fuels to produce 1.07 trillion dollars of gross domestic product in 1970. In 2020, we used 72.9 quadrillion BTUs to make $ 20.9 trillion in GDP. Thus, energy in general and fossil fuels in particular do not play as central a role as during the previous period of high inflation.

Inflation is picking up again, but we are far from the conditions of the 1970s. We are not facing a fundamental change from a gold standard, for example. We have developed significant national fuel reserves, and aggregate demand for fossil fuels may stabilize once the pandemic recovery is over. We are not emerging from a major change in the functioning of global financial markets. We now know how to operate without base metals for our finances. The Federal Reserve has additional levers to help manage the economy, beyond the interest rate targets it used in the past.

Again, the wild card will be the wage rates. If we embrace the idea that wages must constantly rise more than the rate of inflation for the next four or five consecutive years, that in itself could lead to inflation in the system.


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