Posted Apr 2, 2021 by Martin Armstrong
COMMENT: Hi Marty,
Your post today on inflation(when people see it coming) reminds me how things have changed from the 1970s. Then, the inflation we saw came from oil rising(Opec raising prices), unions demanding wage increases, and currencies untethered to the abandoned Bretton Woods agreement. Governments then seemed clueless how to stem this rise, with interest rates rising relentlessly, pressuring bonds and eroding earnings of still largely manufacturing-based economies. Globalization was not an issue as half the world still lived under communism.
Today, it seems central banks have “learned” how to rig interest rates by flooding markets addicted to debt. What is different today is governments now, instead of fearing inflation, actually want it. In fact, desire it to bring about the Great Reset. They appear to want to drive oil prices higher to such levels that this makes Green Energy cheaper and helps to accelerate the conversion over to electric cars. All at the expense of the consumer. On top of this, taxing old tech, principally oil and gas, only helps to fuel shortages, since companies have cut back on oil exploration. When you force people to stay home, the demand for energy shifts from driving to people staying home, more demand for computers, more energy required to supply the grid, more companies delivering products to the home. What has been accomplished? People fleeing high tax states to ones that remain open, those with no state income taxes, those in the south. The burden shifts to northern states, the advantage gained by southern states.
Today, governments are deliberately fueling these shortages…encouraging them, to expedite the transition away from globalization to one centrally controlled. No longer do they need access to debt markets, they can supply guaranteed income without fear of inflation or failed bond auctions. This is truly diabolical. And with Big Tech doing their bidding, people too stupid to grasp what is happening, it appears today’s inflation is by design, intended to destroy a private business, which can’t compete with large companies, jobs destroyed, inflation today used as a weapon against private enterprise. This is pure evil, which stands out against the market-based inflation of the 1970s.
REPLY: You are correct that it was a period of unions demanding more, but it was more than just that aspect. There were two other major developments. First, there were rising prices with lower economic growth. This became known as STAGFLATION. This took place because COSTS were rising from an external price shock that rippled through the economy, which was created at the same time as an economic recession. That never took place before because previous recessions were entirely confined domestically, so prices declined with lower demand.
It was more than simply the collapse of Bretton Woods. It was the in-your-face collapse of Keynesian economics. Still, it was Paul Volcker who followed Keynesianism and raised interest rates into 1981 simply because he had no other theory available. I had a conversation with Volcker at the IMF Dinner in Washington. I did not bash him over his head with his mistake, he was so tall it would have been hard to do so, but we did have a frank discussion of the changes in the global economy.
Today, the central banks are still trapped by the same Keynesian economic theories. Now, they have painted themselves into a corner with artificially low interest rates that they cannot escape without a drastic alteration to the debt markets as a whole. Volcker could at least correct his mistake by lowering interest rates. Today, the central banks cannot raise rates without blowing up their own portfolios. It is a very different type of crisis they face today than what it was during the 1970s.
Tags: Central Banks, Interest Rates, Keynesian economics, Paul Volcker