Quote of the day: Stagflation & the 1970s
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Is it kosher to make myself the quote of the day?
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"I find it funny that people who didn't think there was any inflation in the pipeline are now talking about stagflation," said Barry Ritholtz, CEO and director of equity research for Fusion IQ. "This is nothing like the 1970's, which was a pretty dismal period, and not just because of polyester and disco."
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Even my detractors will have to admit that's a funny line . . .
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Source:
Watch inflation now!
Chris Isidore,
CNNMoney.com February 21 2008: 2:19 PM EST
http://money.cnn.com/2008/02/21/news/economy/inflation/index.htm
Friday, February 22, 2008 | 10:00 AM | Permalink
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Good one Barry...what about the importation of inflation from over-seas? Is that a non-issue?
Posted by: JustinTheSkeptic | Feb 22, 2008 10:06:25 AM
That's the next part of the column:
Inflation hawks: Dust off the bell-bottom pants
Still, there are reasons the economy could be heading for a period of stagflation.
The weakening dollar is a concern since it raises the price of dollar-denominated commodities, such as oil and other raw materials, as well as imported goods.
Ritholtz argues the weaker dollar is part of a longer-term trend that could keep price pressures building to very painful levels in the future.
"The big risk is not that we have stagflation today," he said. "The risk is down the road this turns into a serious case of stagflation. If I had to guess where we are, I'd say we're probably where we were during the oil shock of 1973-74."
Ritholtz said that overseas demand from growing markets such as China and India are likely to keep prices for many goods high, even if consumption of those products falls in the United States.
"Unless we see a significant U.S. recession that causes a slowdown overseas, inflation may be stickier this time around," he said.
Posted by: Barry Ritholtz | Feb 22, 2008 10:12:54 AM
Hey, back off Disco.
Donna Summer for President.
Posted by: Street Creds | Feb 22, 2008 10:13:07 AM
These are usually the same people that use the term disinflation, which apparently means to "diss" inflation - the FOMC's current monetary policy.
Posted by: Deborah | Feb 22, 2008 10:17:19 AM
So it seems inevitable that the FED will continue to cut, but will mortgage rates follow if this in turn raises inflation? Lately, mortgage rates have risen despite the continued cuts. TIP and DBA are solid and I like CGW for the long term, but what other investments should we be looking at? (I’ve never liked precious metals unless they are useful for something other than jewelry-like lithium.) The forthcoming fire sale on unsold condos in certain markets is begining to look intriguing over the next year as well.
Posted by: GreenMachine | Feb 22, 2008 10:17:32 AM
We aren't expanding monetary base or credit. We have had our inflation, but this time it showed up in asset pricing. In fact this is way worse than the 1970s. Our balance sheets and income statements were in much better shape individually and as a country, we were just coming off the Gold Standard, we still had our manufacturing base, we had just started the two income lifestyle. Today, who exactly do we send out to make the extra income needed to pay off the only thing that remains, DEBT. I guess Granny and the kids can pick up the slack.
Posted by: SPECTRE of Deflation | Feb 22, 2008 10:36:44 AM
Sometimes I can't figure out if I'm agreeing or disagreeing, with the great BR.
I can't figure out if we are in the late 60's mid 60's early 70's late 70's. All I ever think is that it Rhymes, and last time it ended with Volker and huge unemployment.
it would be nice if we could skip to the end as fast as possible.
Death of disco, and a double side of Punk.
Rebirth of rock and roll, and a hella bull market... with little inflation.
Kind of says that we are in the early "hermans hermits/the birds" stage of things... Cause I havn't seen "The Doors"
But.. I guess Britney spears and her crack addiction is kind of a passing of the "Dry White toast" in music..(but she was hot in that little school girl thing)
Guess what I'm getting at is without some good music.. we aren't even half way there.
maybe we need chart porn with music and the DOW
Posted by: Eric Davis | Feb 22, 2008 10:48:46 AM
Vickie Sue Robinson was hott ...
Polyester, not so much.
Posted by: Douglas Watts | Feb 22, 2008 10:51:59 AM
At this time, I think anyone who worries about stagflation is comparing normal times to credit powered overdrive spending, confusing the latter with normal times.
Compared to the crack and meth powered Consumption of recent date, even the best of times would look like stagflation in comparison.
Just because tie dyed shirts are making a comeback ... I have three ... this does not imply the stagflation of the 70s is back.
Posted by: cinefoz | Feb 22, 2008 10:52:42 AM
spectre-
has it occurred to you that the expanding monetary base that you can't find any evidence of just bypasses the "regular" avenues of distribution and is sent directly at equities??
Nahh...that would make sense.
Ciao
MS
Posted by: michael schumacher | Feb 22, 2008 10:54:57 AM
I also see all the powers that be sitting around in a circle doing you know what. No one is stepping up to put a floor under anything at this point. How do you get inflation moving forward when we are in a contracting credit environment? Inflation is too much money chasing too few goods. As Cuba would say, "show me the money".
Posted by: SPECTRE of Deflation | Feb 22, 2008 10:56:09 AM
MS, no I'm following everything pretty closely, but if you have any facts to add to your thought, post them. I want to see where it all comes from, and maybe you found a money tree. Otherwise we are SOL.
Posted by: SPECTRE of Deflation | Feb 22, 2008 10:58:55 AM
No period in history has had so much aggregate demand...huge demand growing at such an incredible pace.
Big demand, growing labor base, determination by the wealthy to squeeze the working poor for every dollar they can because suddenly the going price for yachts is skyrocketing.
Can the few effectively manage the perceptions of the many?
Posted by: KP | Feb 22, 2008 11:02:57 AM
MS brings up a good point concerning monetary base and credit. Can anyone name one thing that shows growth in money supply or credit? I mean if it's out there, show us all where it is. I see credit/debt being destroyed on a daily basis, so I won't bother posting that info because we are all aware of it, but if someone has information that the FED is being generous with money and credit, please point it out. Don't leave us in suspense with your knowledge.
Posted by: SPECTRE of Deflation | Feb 22, 2008 11:04:31 AM
Concerning global growth, I agree that demand will continue to build, but taking the Chinese as an example, I keep hearing about the 1.2 billion people in China, but I don't hear many saying that the 1.2 billion are poor peasants who are very far being consumers anywhere close to the developed world. They spend a third of the income on food staples to our 8%. Good luck on waiting for the Chinese. Did you see where the demand for Gold in India is down around 70% YOY?
Posted by: SPECTRE of Deflation | Feb 22, 2008 11:09:42 AM
Chicks dig men who wear lime green or powder blue leisure suits, with super wide lapels, in any macro environment.
Posted by: Groty | Feb 22, 2008 11:13:36 AM
Damn... I'd love to have a lime green leisure suit... extra wide lapels and some Snap Bell bottoms and platforms...
maybe some Neon Accents.
Posted by: Eric Davis | Feb 22, 2008 11:18:01 AM
think repo. process.......
Exchanging near worthless paper (on the perception that it is still worth what it was early last year) for cash is not expanding the monetary base???? Capital has been destroyed......but it's still early 2007 for the Feds and the repo. window.
How is that not growing the monetary base??
There is no smoking gun to be had in this argument so I think efforts to find such should be directed in places that show how declining assets can be exchanged for cash. The real argument in that process is who determines the "worth".......
Ciao
MS
Posted by: michael schumacher | Feb 22, 2008 11:21:42 AM
Ah yes, we have had a bout of demand pull, commodity style. Guess what comes next, cost push....wages and service prices.
I am aware we have not the unionized labour base of the 70's so it will no doubt begin with Government employees, police and fire, teachers and municiple workers. These folks are difficult to outsource. You can't send your bath tub to Bejing to fix a clogged drain.
I have a fellow who works for us part time doing odd jobs and what not. He also has a day job so he would be considered moonlighting. He works by the hour so in January we increased his pay by 10%. He was going to ask anyway. Last year he started charging us an extra $10 a trip to help offset his truck expense. Just one example of off the radar wage increases.
It will be a long time til we monitize cheap African labour. The 1973-74 analogy is spot on. It will no doubt be somewhat different but it will feel the same.
Posted by: Ross | Feb 22, 2008 11:27:10 AM
SoD,
For whatever its worth, the MD of McKinsey & Co in China might not share your opinion on the velocity of growth of the Chinese middle class.
http://www.csmonitor.com/2007/0102/p01s02-woap.html
Posted by: bonghiteric | Feb 22, 2008 11:34:33 AM
Things you own are going down in value, things you consume are getting more expensive, and commodity prices are rising. It would seem like the 70’s except interest rates are not 15% and Volcker isn’t the man behind the curtain. What if commodity prices are just the next asset bubble to pop, or at least begin the descent? I have a feeling this won’t be over until the price of credit is cheap, but only for those that don’t need it—just like the good old days.
Posted by: Johnny Vee | Feb 22, 2008 11:44:54 AM
MS, Firstly the FED overcollaterallized 150% on any paper it holds. To think that the paper is worthless is silly, although exactly what anything is worth will have to be discovered. If you really want to see a CB play fast and loose, check out the EU.
If I add up all the writedowns that have taken place, not to mention what is to come, net net it's a wash or worse. In other words, they cannot generate enough new credit to replace the vaporized credit.
Here's an interesting thought. What happens to a 2% Treasury when money supply is contracting 2 to 3 percent per year? It's some figuring, but I have confidence in your multiplication already.
Posted by: SPECTRE of Deflation | Feb 22, 2008 11:47:08 AM
Spectre,
I think what you may be looking for is in this article.
http://www.financialsense.com/editorials/williams_j/2008/0114.html
Based upon that article, M3 is growing at ~15% yoy, and the monetary base is still growing at 1.5% yoy. Hardly massively deflationary.
I completely agree that we are have a lot of credit destruction . . . however, my basic belief is that what allowed a lot of the credit to be created in the first place was an inflationary policy to prevent a big recession in 2001. So we have a couple of choices now, we either let the system purge itself by allowing the excess credit to get destroyed (b/c it was superfluous in the first place), or we try to maintain the extra credit and prevent a recession by creating more money-see M3. Unfortunately, it is my belief that the money created now by lower interest rates, fed infusions, etc, will not all go to support the credit bubble. It will collapse b/c it was unsustainable and risk was not probably taken into account. Sure the infusions will prob. help a little, but not enough to prevent it.
My premise is the money being created now-M3 will funnel to where it can be used the most to make money. Stock market is dead (oh sure you can still make money at it but we aren't going to be seeing 10-15% returns over the next 5 years. Housing is dead. Bonds are dead. The only place left to make money for big funds/investers right now are commodities, which are booming. Before it's over we'll have a commodity bubble just like Naz 01 and Housing 05. And we are not in a commodity bubble yet, I'd say we are at about 01-02 housing boom point.
Posted by: Shane | Feb 22, 2008 11:47:19 AM
wow, please ignore the massive typos, probably->properly . . . master's degree work getting to me . . . ugh.
Posted by: Shane | Feb 22, 2008 11:50:13 AM
Ross, you better check out this site before we start talking about wage inflation. Where does the wage inflation come from when there is no money to pay prior obligations? pensiontsunami.com with headlines from today:
February 22, 2008
Vallejo, California's Finances on the Brink
Visalia, California Raises Retirees' Share of Health Costs
Orange, California School District Votes to Offer Generous Retirement Buyout
Orange County, California Investments Lose Market Value as Fund Nears Default
Turbulent Wall Street Erodes New Jersey Pension Funds by $4 Billion
Evanston, Illinois Looks at New Taxes, Fees and Budget Cuts to Deal With $140 Million Pension Liability
Joliet, Illinois Police and Firefighters Address Pension Funding Decline
Kentucky's Proposed Pension Reform Plan Reduces Benefits for Future Workers
Kentucky's Governor Sends Pension Plan to State Legislature (press release)
View the Slide Show Outlining Proposed Changes to Kentucky's Public Pension System (pdf)
North Carolina Treasurer Defends Pensions; State Workers Group Given Records
West Virginia Teacher Pension Bill OK'd by House, Sent to Senate
Public Employee Benefits for Younger vs. Older Workers (column by Girard Miller)
Bond Crisis Already Crimping Cities and States
Boomers Have Changed the Nature of Work, Why Not the Nature of Retirement? (column)
Posted by: SPECTRE of Deflation | Feb 22, 2008 11:52:05 AM
