"...Every
morning, when you look in the mirror, I want you to think 'What am I going to
do today to increase the money supply?'..."
John Ehrlichman, assistant to Richard
Nixon, apparently speaking to Charles
Pardee, a Federal Reserve governor,
sometime in the early 1970s
SO WE'RE ALL agreed then.
"This is clearly the worst financial problem
we've had since the Great Depression," as Joseph Stiglitz
said on a radio show in New
Zealand on Wednesday morning. (He's there
attending a conference.)
The Nobel-winning economist lined up behind
Countrywide Financial (July '07), Wells Fargo (Nov. '07), former Treasury
advisor Nouriel Roubini
(Dec. '07), the National Association of Homebuilders (March '08) and pretty
much everyone else in saying this is as bad as it gets.
As in, the worst ever - like finding nothing besides
Of Mice & Men to order from Amazon, and nothing but Seabiscuit to rent at Blockbusters.
The men now pulling the Fed's monetary levers sure
agree. And while Ben Bernanke might see the shadow
of depression where the rest of us glimpse a shade of recession, liquidating
the mal-investments of 2002-2007 is certainly hurting.
Imagine the US Treasury paid your wages each month;
you'd jump to increase the money supply every chance you got, too. See, it's
the only way to stop the Nazis taking over. Or the Commies.
Or maybe even - oh, horror! - the
Democrats...
"Involuntary unemployment," as John F.Kennedy put it, way back in 1960, "is the most
dramatic sign and disheartening consequence of under-utilization...We cannot
afford to settle for any prescribed level of unemployment."
Barely a generation after the worst recession in US history,
backing labor over capital like this - and thereby
nabbing labor's far weightier vote - meant JFK got
to kick Richard Nixon around at the ballot box.
When his turn at the top finally came round at the
end of the '60s, Tricky Dicky didn't forget the
kicking. In fact, "I [already] knew from bitter experience how, in both
1954 and 1958, slumps which hit bottom early in October contributed to
substantial Republican losses in the House and Senate," as Nixon himself
wrote in 1962.
So come December of 1968, when Herbert Stein first
met with Nixon as head of his Council of Economic Advisors - and he asked
Stein to name the biggest problem they faced - "I started with
inflation," said the economist.
"[Nixon] agreed, but immediately warned me that
we must not raise unemployment," Stein was to recall nearly 15 years
later. "I didn't at the time realize how deep this feeling was or how
serious its implications would be..."
Fast forward to the brink of Easter '08, and the "serious implication" of the Great
Depression once again today is the cost of not acting to prevent it. Or so
everyone says.
And I mean everyone...
"The Liquidationists
turned the 1930 recession into a slump," says Ambrose Evans-Pritchard
for The Daily Telegraph here in London.
"They insisted with Puritan zeal - or malice - that speculators should be
driven to the wall amid a cathartic purge of the Roaring Twenties.
"Among them were top bureaucrats at the US
Federal Reserve and some of Europe's central
banks. The consequence was the Brüning
deflation in Germany,
ushering in the Nazis. Democracies snapped across half of Europe.
If it had not been for the towering figure of Franklin Roosevelt, America
might have splintered into a bedlam of Prairie populists, Coughlan
Fascists and Huey Long extremism."
Better anything - even a bail-out of Wall Street's hated
bankers today - than jack-boots and Benzedrine addicts with Chaplin
moustaches, right? And where better to start in getting the voters on-side
than with Ben Bernanke's complete collection of The
Waltons, series 1 to 9, on DVD...?
"During the major contraction phase of the
Depression, between 1929 and 1933," as Bernanke
said in a speech of 2004, "real output in the United States fell nearly 30%.
"During the same period, according to
retrospective studies, the unemployment rate rose from about 3% to nearly
25%, and many of those lucky enough to have a job were able to work only
part-time."
By comparison, the 1973-75 recession
- "perhaps the most severe US recession of the World War II
era," according to Ben "John Boy" Bernanke
- real output fell 3.4% and the unemployment rate merely doubled from 4% to
9%.
So never mind about the double-digit inflation. Never
mind that by the end of the '70s, "every business decision [had become]
a speculation on monetary policy," as J.Bradford
De Long put it in a 1995 essay (from which we're quoting liberally, by the
way). Never mind that business can't function if money becomes a flickering
variable, making the trade-off between inflation and jobs...bail-outs and
growth...a loser both ways.
"Other features of the 1929-33 decline included a sharp deflation," Bernanke went on in his speech, soup-ladle in hand and a
Baker Newsboy flat cap on his head. "Prices fell at a rate of nearly 10%
per year during the early 1930s - as well as a plummeting stock market,
widespread bank failures, and a rash of defaults and bankruptcies by
businesses and households."
So no matter the cost, deflation must be defeated
long before it arrives. Indeed, the higher the cost, the better!
"In 1938, the Congress enacted the Fair Labor Standards Act," writes David Hackett Fischer
in The Great Wave - his sweeping review of history's longest
inflations - "which set the first national minimum wage. It also briefly
considered a maximum wage, but that idea was quickly forgotten."
Over the next 30 years, this upwards bias in wages -
all floor and no ceiling - was "built into the American economy,"
Hackett Fisher goes on. "Floors under wages, pensions, and compensation for
the unemployed; floors beneath farm prices, steel prices, liquor prices, and
milk prices; floors for airline fares, trucking charges, doctors' bills, and
lawyers' fees..."
Come Nixon's first term, the high cost of living was
mandated by government, corporations, unions and householders alike. Falling
prices could not be allowed ("You remember the '30s, don't you?")
and - as yet - rising prices were no more than a puzzler at the grocery store
every Saturday morning.
Convinced by economists of a trade-off between
rising prices and jobs, governments everywhere watered and tended inflation,
thinking they could always prune it if the foliage got out of control. And
feeding its roots, deep below ground, was the rich, manure mulch of the Great
'30s Depression.
"At the surface level," De Long explains,
the destruction of money during the '70s happened because no one in power
"placed a high enough priority on stopping inflation." Worse than
that, Nixon and his successors - Ford and then Carter - inherited
"painful dilemmas with no attractive choices". The '60s battle to
grow jobs at the expense of sound money had already locked in that problem.
Look deeper again, and "no one had a mandate to
do what was necessary," our Berkeley
professor goes on. "It took the entire decade for the Federal Reserve as
an institution to gain the power and freedom of action necessary to control
inflation."
But at the very deepest level, "the truest
cause of the 1970s inflation was the shadow cast by the Great
Depression," De Long concludes. "It took the 1970s to persuade
economists, and policy makers, that 'frictional' and 'structural'
unemployment were far more than one to two per cent of the labor force. It took the 1970s to convince [them] that
the political costs of even high single-digit inflation were very high."
In short, the developed world balked at the chance
to "Liquidate labor, liquidate stocks,
liquidate the farmers, liquidate real estate" - as US Treasury secretary
Andrew Mellon had urged in the '30s - when the liquidation wouldn't have
washed so deep or so hard at the start of the '70s.
Scared by the ghost of a Greater Depression instead,
the West pushed ahead with big budget deficits, negative real interest rates,
and a destruction of money that almost bankrupted Treasury-bond holders. The
runaway inflation that failed to back off when Richard Nixon nudged the Fed
about defending jobs before the Dollar (for what else is
"inflation" if not a loss of purchasing power?) proved a hard-won
lesson all told.
Reaching double-digits across the developed world,
and causing a flight into commodities that in turn led to a huge bubble of
mal-investments in the early 1980s, the "sustained spurt" of '70s
inflation equaled the worst war-time price
increases by the time double-digit interest rates could be used - with broad
voter approval - to kill it off.
It all ended - guess what! - with
a forced liquidation at the start of the '80s. And today?
"Ben Bernanke is
smarter than I am and thinks about this 24/7 which I do not," says
Bradford De Long on his blog this week. "He
leads a superb committee. He is backed by the best monetary policy technical
economic staff on the world. If I disagree with Ben's FOMC on an issue of
monetary policy, I am probably wrong."
Either that, or Bernanke's still stuck on Walton Mountain nostalgia...just like TV
audiences were back in the '70s.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
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