Why inflation this time will be much worse than the 1970s

I have been worried sick over the falling dollar and its effect on my retirement savings, so I have been following the economic news closely. The collapse of the dollar is expected to bring on a surge of inflation, as imported foreign goods, including oil, become much more expensive in dollar terms.

The last bad inflation this country suffered was from the late 1960s until the arly 1980s, when purposely created sky high interest rates and a recession "wrung" inflation out of the system, as Paul Volker used to put it.

This time, inflation will be much, much harder on working families. That's because during the 1970s, American unions were strong, American labor faced little competition from Mexican, Chinese, and other low wage work forces, and American corporations were relatively immobile.

This meant that every time producer prices went up, labor forced employers to raise wages. Inflation in the 1970s was often referred to as the "wage-price spiral", because higher wages required producers to raise product prices, which in turn caused unions to demand wages, and so on. As a college student in the 1970s studying economics, I remember that professors almost never dwelt on the cost to worker-consumers of inflation, because they were quite low. The burden of inflation fell mainly on people with savings, the value of which declined, and people on other kinds of fixed incomes, and financial institutions. It also caused "transaction costs" -- namely the work of constantly repricing things, eg when the supermarket had to have extra clerks constantly relabeling prices. But workers, represented by unions and part of an irreplaceable labor force, were generally not hurt. In fact, homeowners were helped because over time, when the purchase prices of their homes, locked into fixed rate mortgages, declined in real terms, while the value of their homes increased.

This time it is going to be so much worse for working families. Real incomes of working and middle class people have been declining for 25 years -- approximately since the end of inflation. Unions are very weak, having essentially been forced to negotiate give-backs for the last several decades. And the labor force in general cannot demand higher wages, because corporations easily move operations to low wage labor markets like Mexico and China. The entire manufacturing base has been gutted, and we have become a nation of Walmart clerks, burger flippers, health care aids -- with a "cream" of corporate executives, lawyers, doctors and media makers floating on top of the income pyramid.

When inflation comes, probably sometime toward the middle of 2005, middle and working class families will simply have to swallow the price increases without any offsetting wage increases -- leading to a decline in real wages. Unlike the 1970s, dramatic increases in interests rates will be passed along to consumers through variable rate mortgages and credit cards.

The inflation of the 2000s is going to be an economic bloodbath -- the final economic blow to the middle class, and we will find ourselves in something like the situation of Argentina's "former" middle classes.

are very close to the 77 take off of inflation numbers.

that wages are flat or stagnant. This is a straightforward transfer of wealth from consumers to producers -- rather than a wage-price spiral.

This is going to be bad. I think it will end up crippling the repub party. Bush will go down as the worst president ever. He has screwed up everything he has ever done in his life, why should this be any different. This is what you get when you put an ignorant, srrogant imbecile in the Whitehouse.

Inflation is ALWAYS hard on working people. This will be no different. And, inflation is always hard on companies because it inhibits growth.

There is not a shred of econometric data to support your contentions, and as someone who publishes on econometric modeling i cannot let such "sky is falling" proclamations to go unchallenged.

Which model did you use to support that the fall of the dollar is linked to inflation on a grand scale? Nothing in my literature or my own models indicate that such a correlation exists.

Which set of economic theories suggest a link between CEO or profesisonal compensation and the subsequent impact on middle class people and the prices they pay? I see no such theory set, and i'm pretty well versed.

Economic bloodbath? Based upon what comparable situation. Argentina? Please share your methodology for comparing that macroeconomy, to this one. I do intereconomic studies quite often, and i see absolutely no comparison in the economic structures of the two countries.

Please enlighten me because obviously i just don't get it.

The Professor

And indeed inflation IS always hard on working people.

I disagree with the inflation hard on companies given the GDP growth of 3.3% compounded over 4 years under Carter -and the inflation that he had - and the earnings growth my operation was able to show during those years. Perhaps GDP growth did not get reflected in overall Corporate earnings growth - I have not looked at it - but back then FASB allowed/made it easier for you to put away earnings for future lean years.

As econometric data to support the contentions - I suspect the poster was factoring in the 2 trillion addition to the deficit from 10 years of Social Security transition cost, $1 trillion of addition debt (minimum) from making permanent the 01/02/03 tax cuts, the %70 billion a year add on expected for the Iraq War that Bush refuses to budget for - and then that projected for another 0.7 trillion over 10 years, and of course interest costs of an additional 1 trillion over 10 years.

And while the fall of the dollar is not linked to inflation on a grand scale - it is linked on a small, but expected to increase as we outsource more?- scale.

Totally agree on CEO pay having nothing to do with anything - except attitude as to sharing any corporate earnings increase with workers.

While Argentina may be a stretch, the Japan world of 1990 seems to be one we are in now - with interest rates held down by the fact of a lousy economy - and government structural deficits stopping real growth (we get the improvement in product quality growth in the US method of calculation- and folks say it adds less than 1% to GDP compared to the EU calculation method- but I wonder). Bush has put into play the Euro as replacement for $ as reserve currency - it is not going to happen over night - but it is much further along than I expected it would be in 2000.

But I agree that the "sky is not falling" - not even in the projections ... YET

:-)

:toast:

:-)

Thanks, by the way. The earnings you describe have to be adjusted for inflation as well, and when compared to the static asset base and the level of invested capital, most firms, large and small, had very poor return on assets or investment in the late 70's. Remember that's when many companies, for the first time ever, had to employ wage freezes to stabilize expenses. (Something like 40% of all the companies that froze wages had never had to do something like that before.)

Also, don't get me wrong on the CEO compensation thing. I do agree that this has spiraled to unproductive levels and that people are being rewarded that don't provide the company with long term positioning. So, i'm not defending that in any way, shape, or form. It's just that it doesn't have much to do with the topic at hand. Just wanted that clear.

When 60% of the corporations in this country are still paying their CEO's at the same level (relative to the median pay level) the same as in 1960, it's just the egregious levels (think Disney) that get exposed. So, while it's bad, the cases of abuse have a lesser impact on the whole than would be believed by the bad press that people like Eisner deservedly get.

Last point: I see nothing in the currency history that suggests that the currency of dominance is affected by anything other than overall macroeconomic strength. The strength of the U.S. economy is still dominant and even in this weak period, is still positioned for long term dominance. The U.S. dollar didn't supercede the Pound Sterling as the currency of world trade because traders and investors liked the color better. It was because the backing of that dollar was rooted in the strongest economy. So, these little shifts in currency preference are not a good indicator of future performance. On top of that, remember that the motivation of some neocons in controlling the oil supply is based upon avoiding the switch to euros as the pricing structure for oil. If they believe that, i would run away fast from any similar point of view.
The Professor

gets a bit of a higher valuation than it would otherwise - leading to a better standard of living?

I swear that was conventional wisdom back in the 50's re Pound Sterling.

And I enjoyed the laugh /smile re your comment on neo-con fighting to have oil not priced in euros! :-)

We are on the same page -

but I wish I could run your model with all the likely deficits in place - or with such deficits reflected in the equations relating the various variables.

In some some old models, as I recall, the only reflection of gov debt increase was as a demand increase for goods and for capital and therefore a slight interest increase - while not reflecting the step nature of the investment hurdle rate in any (low or high) interest rate world.

Where the low rate was caused by poor overall econ growth that did not justify/make feasible higher interest rate charges by the owners of capital, the low interest rate by itself in the model was a major unstoppable stimulus - an idea proved incorrect by Japan.

I need to refresh my memory re models today - any links you'd suggest? (As if I could absorb a 100 pages on the Warton model - sigh - I mean links to a nice abstract or two! :-) )

I'll just shut up ..... Not!

Where to start? You are an expert in economics and you don't believe that a falling dollar is likely to lead to higher costs for imported goods? Where did you study economics?

You don't need an econometric model to know that -- it's economics 101. As the dollar falls, against foreign currencies, the prices of goods denominated in foreign currency prices rise. This makes imported goods more expensive. Generally rising prices is the defintion of inflation. Have you noticed the difference in the price of gas? If the imported good is used widely in production -- ie if its petroleum -- then there is going to be a generalized rise in prices. Did the oil-price driven world wide inflation of the late 1970s never happen in your view?

Do you have any econometric models in which the decrease of a local currency in an economy heavily dependent on imports does not lead to inflation? How can that be?

And inflation is not always hard on working people -- it is hard on working people whose wages do not rise to keep up with inflation. If a working person with no savings has wages that are indexed to inflation, where is the hardship?

Obviously, in the 1970s workers did not have perfectly indexed wages, but my point is that with unions and better bargaining power, workers fared better in the 1970s than they are likely to fare in 2000, in the absence of strong unions and bargaining power.

That's why inflation in the 1970s was called the wage-price spiral.

Is it your position that workers are in a better position now than they were in the 1960s and 1970s, to demand wages that keep up with inflation? Where is your evidence of that? Oh wise one, where is your econometric model that shows that real wages have been rising, or that in the face of globalized wage markets, workers will be able to command higher wages? If in your models, real wages been rising, have all the other models been wrong? If so, how can we earthlings come to live in your world?!?

And where oh where did I mention CEO and managerial compensation would decrease worker wages? Did you just make that up to throw it in the mix mr professor man? On the other hand, oh wise one, do you need a complex econometric model to estimate the effect of executive compensation on wages within a particular company if executive compensation rises eg to 1/3 of revenue?

I never said any such thing. What i said was that everything in the original post was OVERSTATED! Not wrong, but exaggerated. So, you're putting words in my mouth, not the other way around.

Merely mentioning the CEO pay in a doom and gloom post would seem to imply a connection. I merely said there wasn't one.

I also never said real wages were rising. Where the heck did you get that from? Not from me, because i never said any such thing.

And yes, inflation is ALWAYS hard on working people. You're not an economist? No kidding. No examples of when your "indexing" actually occurred, just a simple two dimensional hypothetical of when it MIGHT not happen.

If there is no direct index to price with wages, then it hits the middle and lower classes hard. Tautalogical fact. If you could show me one macro example of when companies, against their own best interests, raised salaries to maintain inflation parity, i'll compliment you on your research. But, no hypotheticals. Facts!

Besides, all i suggested was that you're exaggerating the problem. I never said the economy was good. I never said your basic concerns weren't valid. My "models" suggest actually that this is the worst economic condition since 1979. But, you are the one that said it's worse and that there would be a economic bloodbath.

I was objecting to your hyperbolic conclusions. I never said there wasn't any reason to look for solutions to an untenable situation. The gov't cannot spend 5% of GDP it doesn't have forever. My first published paper was on why hyperKeynsian approaches are doomed to failure and was a direct reaction to what the Reagan administration was doing. So, once again, you misrepresent what i believe and what i said.

And, you STILL haven't established where the correlations exist for you to reach these severe conclusions. You just got high and mighty and started name calling.

Last point: I am admittedly a radical in the economics community. I don't believe in most of the conventional theory and have published EVERY SINGLE ONE of my papers as refutations of conventional wisdom. So, "wage/price" sprial is meaningless to me. That's just conventional wisdom, and i have little use for things for which there are no proof.

There are so many interacting factors that result in that phenomenon that the fact that is happens occasionally is hardly a predictor that it will happen again, no matter the current situation.

If you don't want someone to disagree with any or all of a post you make, why make it? Everyone here is supposed to fall into lockstep with everything everyone else here says? It's not what i come here for. Do you?

Sheesh. Take a pill and calm down, ok. At least, if you want to debate, read what i said and quit drawing inferences that aren't there.
The Professor

Your problem is that whatever you mean to say -- and I'm not sure what that may be -- is obscured by the fact that rather than dealing in substance you use really old, threadbare rhetorical devices to make your points. It makes every single thing you say sound silly and inconsequential.

Let's go back to your original post:

"There is not a shred of econometric data to support your contentions, and as someone who publishes on econometric modeling ...I see no such theory set, and i'm pretty well versed." But it is transparent that what your are doing is saying, I'm so smart and qualified that no one else should contradict what I say. Much of the substance that followed was illogical and silly, but you put up your big fence of credentialism, so that no one is supposed to respond. This is the oldest trick in the book of empty rhetorical stragegy. Do you think you are the only credentialed person on DU? The rest of us are just too mature to try to brag about it. Indeed a highly credentialed person probably would not want to be associated with an illogical and arrogant post.


Next you immediately proceed to what is an even more sorry-ass rhetorical strategy: imposing an impossibly high standard of proof given the forum: "Which model did you use ..." Since when do people on DU have to publish econometric models in order to comment on the economy? That is as absurd as responding to a comment that it is raining, with "On what meteorological model do you base your conclusion?" If I can only comment on the weather after publication of a full meteorological model, well, there will be few comments about the weather.

The notion that a falling currency can lead to inflation is so common sense that it doesn't need an econometric model. I could cite you to my economics textbooks, but obviously they are not on line. This is a way of saying, unless you can provide the particular proof I demand, you may not comment. This is absurd and arrogant.

Another tired-ass empty rhetorical strategy is revealed in this phrase: "i cannot let such "sky is falling" proclamations to go unchallenged." In other words, you now set yourself up as the gatekeeper of comments on DU. Unless comments meet the criteria unilaterally imposed by mr professor, econometric (but oddly lacking common sense or basic economic princples) modeler, then they will be banned, because mr professor "will not allow such comments".

Then comes the next textbook gambit -- make a false claim and dare the respondent to defend it. You wrote, "Which set of economic theories suggest a link between CEO or profesisonal compensation and the subsequent impact on middle class people and the prices they pay?" Where in my original post did I say CEO compensation has an impact of prices? Try this on for size: A person like you who regularly defends wife beating, child rape and genocide should not engage in debate concerning economic topics on DU. See the point?

There are a lot of good posts on DU and a lot of silly posts, but rarely do we get to read such breathtakingly empty rhetoric.

The thrust of my original post was this: Labor's wage bargaining power has declined for both market based (globalization) and institutional (unions) reasons, and therefore any inflation will have a harsher impact on working families.

You disagree, but can't seem to explain how, other than to say you are smart and as credentialed gate keeper want to hound certain comments off DU.

To put my original statement in a logical format, it would be "If there is decreased wage bargaining power then the impact of inflation will be harsher on workers."

You disagree. Please explain how. Logically, you must be taking one of the following positions:

Labor does not have decreased bargaining power compared to the 1970s and therefore the impact of inflation will be milder; or

Labor does indeed have decreased bargaining power, but the impact of inflation will be milder.

What is the substance of your claim? All I get from your posts is (1) I'm sooo smart, (2) I'm the official gatekeeper of DU, (3) you need an econometric model to comment on the economy on DU.

This is bullshit rhetoric, and that's why I went off on your sorry ass post. What is your position on the substance? Are workers unions more powerful today -- is that your position?

"WIN" whip inflation now, Jerry Fords answer to the problem.

I'm waitng for silver to rise again and wamo, bamo I back in the game of the old days.

"I have been worried sick over the falling dollar and its effect on my retirement savings"

The ravages of inflation are not shared equally. Some profit, and some lose. I remember "trickle down" and "voodoo" economics. I think this latest round of "benefit the rich while beggaring the poor" economics has shown that we'll be waiting a long time for the benefits to trickle down, while the people who benefit the least from these so-called good times will be the ones who pay the biggest price.

We've already had raging asset inflation, but stagnant wages. So, maybe it'll be stagflation again. But I don't think it would take much at this point to send most of the middle class into depression.

Of course, I'm not a professional practitioner of the Dismal Science, but I nevertheless believe that the layman has as much right to an opinion as the expert. After all, the experts are frequently wrong.

Emulate a plan that helped set the stage for Argentina's economic crisis"


"One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts - a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina's economic crisis."