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opendoor · 07-13-2022, 10:29 AM

To me this current situation has much more in common with early '50s inflation than it does '70s inflation:

1950-52:

-after a recession in 1949, the economy began to recover and the money supply increased relatively quickly.

-a supply crunch stemming from the start of the Korean War caused prices to go up, and inflation shot up to almost 10% in a relatively short period of time.

-unemployment was extremely low even during the high inflation period

That inflationary period ended relatively quickly after about 1.5 years of elevated inflation without interest rates moving up at all. Supply constraints worked themselves out over time and price growth returned to a normal level. There was a recession after this period, but runaway inflation never happened even with interest rates remaining flat.

1970s:

-inflation moved up slowly over the 2nd half of the 1960s with little done to counteract it. It started at 1.6% in 1965 and increased to 2.9% -> 3.1% -> 4.2% -> 5.5% and was 5.7% by 1970. This led to elevated inflation being relatively entrenched.

-In the early '70s, oil saw a massive increase in price. For most of the '60s, oil was about $3/barrel. In 1974 that went up by 4x and inflation followed, hitting 11% in 1974. And then it kept going up with little to no relief, and eventually ended up at about $37 by 1981, over 12x higher than the 1960s average price.

-the unemployment rate started to increase in 1970 as inflation increased.

-the money supply kept increasing year after year after year. In Canada at least, it increased by an average of about 15% a year through the 1970s. That's basically equivalent to maintaining the money supply increase we've seen with COVID for a decade straight.

Now:

-Because of COVID, the money supply increased relatively quickly, however that has largely ended. 2022 is on track to see the 2nd smallest increase in M2 in Canada in the last 30 years. If we have a couple of years of slightly below average money supply increases (e.g. 5-6% instead of 8-9%), we'll be right back at the historical trajectory.

-as much as people complain about central banks' slow reactions, they are reacting relatively quickly by historical norms. That didn't happen in the late '60s and '70s.

-unemployment remains at historically low levels (though that could obviously change) and there is already evidence of wage increases moderating a bit (which indicates that a wage-price spiral isn't happening yet).

-energy prices have already pulled back by over 20% from their peak. In the '70s, that didn't happen. Oil never went down by an appreciable amount. From 1976-1978 for instance, the difference between the high and low oil prices within each year was never more than a 5% difference. Oil dropped more than that on Monday alone.

The 1970s inflation was largely driven by energy prices leading to runaway inflation. But the chance of us seeing similar increases in energy prices is essentially zero. The equivalent would be something like $300 oil in the next year or two and then $900 oil a few years after that. So if energy isn't going to increase as much as it did then, and money supply is tightening (which it didn't then), then I don't really see what's going to fuel long-term 1970s style runaway inflation.

07-13-2022, 10:29 AM	#121
opendoor Franchise Player Join Date: Apr 2007 Exp:	To me this current situation has much more in common with early '50s inflation than it does '70s inflation: 1950-52: -after a recession in 1949, the economy began to recover and the money supply increased relatively quickly. -a supply crunch stemming from the start of the Korean War caused prices to go up, and inflation shot up to almost 10% in a relatively short period of time. -unemployment was extremely low even during the high inflation period That inflationary period ended relatively quickly after about 1.5 years of elevated inflation without interest rates moving up at all. Supply constraints worked themselves out over time and price growth returned to a normal level. There was a recession after this period, but runaway inflation never happened even with interest rates remaining flat. 1970s: -inflation moved up slowly over the 2nd half of the 1960s with little done to counteract it. It started at 1.6% in 1965 and increased to 2.9% -> 3.1% -> 4.2% -> 5.5% and was 5.7% by 1970. This led to elevated inflation being relatively entrenched. -In the early '70s, oil saw a massive increase in price. For most of the '60s, oil was about $3/barrel. In 1974 that went up by 4x and inflation followed, hitting 11% in 1974. And then it kept going up with little to no relief, and eventually ended up at about $37 by 1981, over 12x higher than the 1960s average price. -the unemployment rate started to increase in 1970 as inflation increased. -the money supply kept increasing year after year after year. In Canada at least, it increased by an average of about 15% a year through the 1970s. That's basically equivalent to maintaining the money supply increase we've seen with COVID for a decade straight. Now: -Because of COVID, the money supply increased relatively quickly, however that has largely ended. 2022 is on track to see the 2nd smallest increase in M2 in Canada in the last 30 years. If we have a couple of years of slightly below average money supply increases (e.g. 5-6% instead of 8-9%), we'll be right back at the historical trajectory. -as much as people complain about central banks' slow reactions, they are reacting relatively quickly by historical norms. That didn't happen in the late '60s and '70s. -unemployment remains at historically low levels (though that could obviously change) and there is already evidence of wage increases moderating a bit (which indicates that a wage-price spiral isn't happening yet). -energy prices have already pulled back by over 20% from their peak. In the '70s, that didn't happen. Oil never went down by an appreciable amount. From 1976-1978 for instance, the difference between the high and low oil prices within each year was never more than a 5% difference. Oil dropped more than that on Monday alone. The 1970s inflation was largely driven by energy prices leading to runaway inflation. But the chance of us seeing similar increases in energy prices is essentially zero. The equivalent would be something like $300 oil in the next year or two and then $900 oil a few years after that. So if energy isn't going to increase as much as it did then, and money supply is tightening (which it didn't then), then I don't really see what's going to fuel long-term 1970s style runaway inflation.