Was Stagflation in ’79 Really Hyperinflation?
by Gonzalo Lira
….In my previous writings, I had originally thought that, when the moment arrived when markets lost faith in Treasury bonds, commodities would go hyperbolic immediately, or within a very short time frame.
However, studying the events of ’79 more closely, I realize I was wrong: I now no longer think commodity prices will spike hyperbolically and in a reduced time frame. I now think commodity prices – and CPI numbers – will rise initially at an accelerated clip, say at an annualized rate of 5–6% in the first month.
But here is the tragedy: Increased inflation will not be perceived – at least not at first – as anything to get into a twist over. Each subsequent month will see an inflationary rise at a slightly faster pace, adding a percent or two a month to the annualized rate – but at least at first, not only will this not be perceived as anything worrisome, it will be considered a good thing: Because of the current deflationary recession we are in, any pickup in the inflation index will be interpreted as a pickup in the overall economy.
Eventually, however, as inflation continues to rise but the jobs market doesn’t really improve, the current American economy will wake up and find it has reached the exact same point that was reached back in March of 1980 – a 15% annual inflation rate.
But here is the key difference: Ben Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did in ’79.
Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), and therefore lacks the balls and the backbone to do what needs to be done, Bernanke simply does not have the room to maneuver, insofar as the Fed funds rate is concerned.
If there was a run on Treasuries, Bernanke today cannot raise interest rates to retain Treasury holders – if he did, he would wipe out all the Too Big To Fail banks, and break the Treasury of the U.S. Federal government, both of which depend on the Fed’s cheap money as completely as if it were oxygen.
Back in 1979, Volcker didn’t have this constraint. He could raise rates – but even so, he paid for it with 400 basis points of unemployment.
However, unemployment today is already at 10%, in a soft credit environment. So even if he didn’t have the TBTF banks and the Federal government on the cheap money life support, Bernanke cannot raise rates in order to stop a run on Treasuries, stop a run-up on commodities, and stop incipient hyperinflation: The economy is too weak. Adding 400 basis points to the current employment situation – that is, driving U-3 unemployment to 14% or more – would cause political pandemonium, not to mention riots.
Finally, Bernanke won’t raise rates – can’t raise rates – because of a disease of the mind that he has: Due to Alan Greenspan’s pernicious, destructive influence, which I have discussed at some length, Bernanke thoroughly believes that only liquidity injections and cheap money can save the economy – he is looking for inflation. He is so terrified of the American economy circling the deflationary drain, that he is deliberately going in the other direction: He is trying to cause inflation.
Bernanke doesn’t realize that inflation is a symptom that can augur many things. He is convinced that inflation means growth – the opposite of deflation. So all his liquidity windows, all his cash infusions to prop up the Too Big To Fail banks and their bankster operators, QE, QE-lite, the forthcoming QE2 – all of it is being carried out by Bernanke so as to cause inflation. He is convinced that inflation will signal that the economy is recovering, and that the Federal Debt will be inflated away, and therefore not break the Federal government finances.
He believes that rising prices will mean that the U.S. economy is about to be saved.
This is why Bernanke is set up to take a hit from hyperinflation: If and when there is a run on Treasuries, and a subsequent run-up of commodities, at least initially, the Federal Reserve under Ben Bernanke will not only do nothing, they will encourage this situation. The Fed and its current leadership will interpret this rise in the CPI number as an indication that “We are on the road to recovery!”
We are not: The first hint of commodity prices rising as the Treasury markets begin to fade will be an indication that hyperinflation is on its way. And by the time we get to our March 1980 moment – by the time we get to 15% annualized inflation index – it will be over.
The next stop will be Zimbabwe.