"The United States stock market has just completed its best six months since 1933. From March 9 to Sept. 9, the Standard & Poor's 500-stock index leaped by 53 percent.
"But the gain over that period, which began when stocks reached their nadir in March, was not enough to offset the losses recorded in the previous six months. Not since 1932 had the market suffered a half-year period as bad as that one" (Floyd Norris, Around the World, Stock Markets Fell and Rose, Together, nytimes.com, September 12, 2009).
"In an essay for the Encyclopedia Britannica, Christina Romer, now chairman of the Council of Economic Advisers, argued that the 42 percent increase in the money supply from 1933 to 1937 was the main driver of recovery. A tightening of money supply after the Fed ordered an increase in bank reserves in 1936-37, not just the cut in spending, explains the slowdown of the economy at the outset of Roosevelt's second term" (Steven Mufson, For Insight on Stimulus Battle, Look to the '30s, washingtonpost.com, February 12, 2009).
"Analysis of the 1936-1939 period is instructive. Many people believe that the Fed erred by tapping on the monetary brake during 1936-1937, and that if policymakers had simply kept the money flowing then the US economy would have avoided the 1937-1939 collapse (the depression within a depression). However, the collapse of 1937-1939 was the INEVITABLE consequence of the fact that the preceding economic rebound had no real foundation. The rebound was based on monetary inflation and increased government spending, rather than on increased private investment in projects that made economic sense. It was therefore a foregone conclusion that any slowdown in monetary and/or fiscal stimulus would soon be followed by a collapse. The only question was when. If the stimulus had been maintained for an additional year or two then the ensuing collapse would have been even more devastating; and if policymakers had attempted to make the stimulus never-ending then the US dollar would have been destroyed" (Steve Saville, The Inflation Process, 321gold.com, September 1, 2009).
Expansion between the Contractions
"[The] blue chip indexes [are] at 12-year lows... The only other 2 times that saw the S&P or DJIA at 12-year lows over the past century were 1932 and 1974. In hindsight, both instances turned out to be the "buying opportunity of a lifetime"" (James Stack, Investech Financial Update, investech.com, March 6, 2009).
"As the U.S. economy slid into recession in 1974, the Fed again reversed course to ward off an even deeper recession. Indicators show a renewed monetary expansion that lasted into the late 1970s. The Bernanke-Blinder index from late 1974 into 1977 indicates that monetary policy was strongly expansionary. This expansion was not reflected in high inflation initially, consistent with a partial rebuilding of real balances ... and the well-documented fact that inflation only occurs with a delay (see Nelson 1998)... Around 1978, the monetary stance turned slightly contractionary, becoming strongly contractionary in late 1979 and early 1980 under Paul Volcker, as inflation continued to worsen. Once again, the monetary policy stance provides an alternative explanation for the genesis of stagflation" (Robert B. Barsky, University of Michigan, NBER, and Lutz Kilian, University of Michigan CEPR, A Monetary Explanation of the Great Stagflation of the 1970s, fordschool.umich.edu/rsie/workingpapers/Papers451-475/r452.pdf, January 27, 2000).
This article argues that the stock market booms and economic expansions of the 1930s and 1970s, that is, after the 'Hoover' recession of 1929-33 and the 'Bush' recession of 2007-2009 respectively, are the best historical templates to view the future.
But in a reversal of the 1930s, the future contraction will 'rhyme' with the 'Hoover' recession - longer and deeper than the 'Roosevelt' recession. History suggests that the severe stage of the future contraction will occur in a Republican administration.
Economic and Financial Imbalances can only be addressed in a future Great Depression
"In sum, the Fed thought it had learned the lessons of the 1930s, but it had not learned the lesson of the 1920s, that allowing asset prices to soar to absurdly leveraged heights could lead to a financial collapse as the need to repay loans forced sales that drove prices lower, resulting in the need to repay more loans, and so on and so on" (Floyd Norris, Failing Upward at the Fed, nytimes.com, February 27, 2009).
"There are two major things that could go wrong - the commercial property mortgage market and stimulus spending which could cause a bubble. Years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.
"Throwing billions of stimulus dollars at the banks is unlikely to produce a healthy economy because households are broke. At best, it may only lead to a temporary pickup in growth. Stimulus packages around the world are ultimately going to cause more damage than they prevent. These packages have simply delayed the coming downturn, and by adding significant numbers to the massive debt bubbles of the world's nations, will ultimately make the downturn worse than had governments not injected massive amounts of money into the economy.
"When the (current) debt bubble bursts, the world will enter a serious downturn. The bailout is much bigger than the dot-com and real estate bubbles which hit speculators, investors and financiers the hardest. When the 'Bailout Bubble' explodes, the system goes with it because neither the US President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another bubble" (Ernest Kepper, Equities: What's on the horizon, 321gold.com, August 21, 2009).
Overindebtedness
"In recent decades running a business or household with a conservative balance-sheet has been a bit like being the only person in an opium den not to inhale. Consumers and financial firms got sky high on cheap debt. Lots of non-financial companies chased the dragon, too. In America corporate gearing is now at its highest level since at least the second world war, says Smithers & Co, a research firm. Default rates are near their highest level since the 1930s.
"The rash of leveraged buy-outs may account for as much as half of the rise in American corporate net debt since 2002" (The Economist, The sensible giants, economist.com, April 30, 2009).
A key to understanding the outcome to the present economic/financial cycle, using a term employed by the American economist Irving Fisher (1867-1947), is "overindebtedness".
"... the flawed view of the Fed's role in the Great Depression: If only the Fed had created $5bn and recapitalized the banking system. More money, so they believe, would have provided a ("mopping up") remedy for disastrous boom-time excesses. It wouldn't have worked.
"The issue then, as it is today, is not some finite amount of liquidity to keep the banks solvent and markets liquid, but instead the enormous ongoing Credit Creation and Intermediation necessary to sustain levitated asset prices, incomes, corporate earnings and government receipts" (Doug Noland, Money Market Issues, prudentbear.com, August 24, 2007).
For a new sustainable economic/financial cycle to begin debt has to be brought down to a manageable level.
(The Economist, A fate worse than debt, economist.com, September 25, 2008).
Using the last credit/debt cycle, in 1929 "Total Credit Market Debt as a Percentage of GDP", at the stockmarket top was 174%. In March 1933 at the end of the Hoover recession of the Great Depression the ratio peaked at 287%. It was nearly twenty years later, January 1953, that Total Credit Market Debt bottomed at 129% of GDP, marking the beginning of the present credit/debt cycle.
In the Federal Reserve "Flow of funds" release of March 12, 2009, Total Credit Market Debt was $52.6 trillion against a GDP of $14.2 trillion, which yields a total credit market debt as a percentage of GDP of 370%, over twice as high as 1929.
Triple Bubble
In the 1920s it took two bubbles, housing followed by the stockmarket, to push debt, in the good-times, to unsustainable levels.
In 2003 Richard Russell observed that:
"Every movement in the stockmarket, minor, secondary or primary - is ultimately corrected. The "double bubble" that we've experienced under the Greenspan Fed is unprecedented in stock market history... [Greenspan] had succeeded in building a bubble in housing, a bubble in consumer debt, and a bubble in bonds and he's succeeded in resurrecting the bubble in stocks"" (Markets and Gold, dowtheoryletters.com, September 1, 2003).
The "double bubble" may be classified as a dot.com bubble followed by a housing bubble.
But it appears that another bubble is required to bring the global economy to the point that when the restructuring of the global economy - hegemonic and technological - begins in earnest, in another "crisis", the process will not meet too much resistance.
But before looking at the third act - a "triple bubble" - a brief overview is required of a pattern of history seen with major booms or stockmarket rallies.
Global Crisis - Boom - Bust
In the 19th century, the international crisis, that signaled a major stock market rally, at the end of "good times", was often a war. In the 20th century and today it was/is a financial crisis.
For Japan in the 1980s it was arguably the stockmarket crash of 1987:
"Dr Yoshio Suzuki... 'So we kept our low interest-rate policy through the essential period of October 1987 to May 1989. During that time of about one and a half years the economy was rising vigorously, so there was no reason we had to keep the low-interest rate policy and we should have raised the official discount rate...But the judgment we made at the time was incorrect...'" (Peter Hartcher, The Ministry, (Sydney: HarperCollinsPublishers, 1997), p.74).
For America in the 1990s it was the Asian financial crisis of 1997-98.
"...the Federal Reserve began a series of rate cuts ... by a quarter point in September, October, and November [1998] to avert a global economic meltdown and in the process sparked a 191% jump in the Nasdaq over the next 18 months, and a 46% rise in the Standard & Poor's 500 Index" (Nasdaq falls to year low, news.bbc.co.uk, December 19, 2000).
In both cases a low interest rate policy, in response to crisis, contributed to the booms.
In the aftermath of the dot.com bubble the low interest rate policy, though not according to Alan Greenspan, contributed to the housing bubble.
Now in the aftermath of the housing bust is a low interest rate policy contributing to the next bubble?
It has been said that the Federal Reserve and the Federal Government have learned the lessons of post October 29, 1929 and have taken on the business cycle. But is this so?
The aftermath of the bursting of the dotcom bubbble was right out of the play-book of post October 29, 1929.
"The conventional explanation is that Herbert Hoover, President when Wall Street collapsed and during the period when the crisis turned into the Great Depression, was a laissez-faire ideologue who refused to use public money and government power to refloat the economy... There is no truth in this mythology... From the very start ... Hoover agreed to take on the business cycle and stamp it flat with all the resources of government" (Paul Johnson, A History of the American People, (London: Weidenfeld & Nicolson, 1997), pp.614, 617).
"In the belief that tax reduction would counter the depression Hoover asked Congress in December, 1929 for lower income-tax rates. Congress responded at once" (Harold Underwood Faulkner, American Economic History, 8th edition, New York: Harper & Brothers, 1960, p.649).
After the crash on October 29, 1929 interest rates were lowered three days later on November 1 by 1 percentage point. This was followed by a 0.5 percentage point cuts on November 15, 1929, February 7 and March 14 of 1930. Over a period of seven and a half months interest rates went from 6 to 2.5 percent.
These measures contributed to the suckers' rally of mid-November 1929 to mid-April 1930 where the Dow increased 48%. But all was in vain:
" ... despite all the efforts of cities, states, and the Federal government, the upturns [in business factors] were promptly ended. Quite possibly the subsequent downswing was accelerated by way of reaction to falsified hopes" (Irving Fisher, Booms and Depressions, London: George Allen and Unwin, 1933, p.100).
In the examples above a low interest rate policy contributed, in the case of Japan in the 1980s, to a cyclical bull market is a secular bull market, and, in the case of America in the 1930s, to a cyclical bull market is a secular bear market.
The response to the crisis of 1927 also sets a precedent for the underpinning of next great bubble:
"... the Federal Reserve promptly began its great burst of expansion and cheap credit in the second half of 1927. This period saw the largest rate of increase of bank reserves during the 1920s, mainly due to massive purchases of U.S. government securities and of bankers' acceptances, totalling $445 million in the latter half of 1927..." (Kevin Dowd & Richard H. Timberlake, Money and the Nation State, (Edison, Transaction Publications, 1998, p.144).
While there a number of 'rhymes' from history to use as a template to view the future, the 1930s and 1970s may provide the most helpful template.
"[The] blue chip indexes [are] at 12-year lows... The only other 2 times that saw the S&P or DJIA at 12-year lows over the past century were 1932 and 1974. In hindsight, both instances turned out to be the "buying opportunity of a lifetime"" (James Stack, Investech Financial Update, investech.com, March 6, 2009).
1932 was the starting point for a rally in the Great Depression and 1974 for a rally in the Great Stagflation.
The Great Depression maybe defined as a period of contraction followed by expansion, followed by contraction: Hoover Recession - Roosevelt Expansion - Roosevelt Recession.
"The short mild [1980] recession slowed inflation only temporarily. It was followed by the shortest expansion since 1919-20. This episode is thus the only postwar example of a double dip-recession or "W-shaped" business cycle. It is even plausible to view the 1980 and 1981-82 recessions as a single episode of subpar growth" (Stephen K. McNees, "The 1990-91 Recession in Historical Perspective," in Public Budgeting and Finance, 4th Edition, edited by Robert, T., Golembiewski, (CRC Press, 1997), p.113).
The Great Stagflation maybe defined as a period of contraction-expansion-contraction if the Carter and Reagan Recessions are consider as one. Or alternatively to consider the short and mild 1980 recession as part of the expansion phase between two severe recessions - similar to the 1923-24 and 1926-27 recessions of the Roaring Twenties.
The latter revision provides a 'rhyme' between 1932 and 1974. Stockmarket rallies began in these recession years. The Dow rallied 372% between 1932 and 1937 and 76% between 1974 and 1976; but using 1974 to 1981, the peak before the severe recession of 1981-1982, to make a 'rhyme' with 1932-37, the peak before the severe recession of 1937, the Dow rose 77.3%.
The Great Depression may therefore be book-ended by the severe Hoover and Roosevelt recessions and the Great Stagflation by the severe Nixon and Reagan recessions.
Using the 'rhyme' of blue chip indexes at 12-year lows in 1932, 1974 and 2009 the severe Hoover recession 'rhymes' with the severe Nixon recession which 'rhymes' with the severe Bush recession.
"The two most prominent increases in the price of oil in 1973/74 and 1979/80 were both preceded by periods of unusually low real interest rates ... and economic expansion...
"As the U.S. economy slid into recession in 1974, the Fed again reversed course to ward off an even deeper recession. Indicators show a renewed monetary expansion that lasted into the late 1970s. The Bernanke-Blinder index from late 1974 into 1977 indicates that monetary policy was strongly expansionary. This expansion was not reflected in high inflation initially, consistent with a partial rebuilding of real balances ... and the well-documented fact that inflation only occurs with a delay (see Nelson 1998)... Around 1978, the monetary stance turned slightly contractionary, becoming strongly contractionary in late 1979 and early 1980 under Paul Volcker, as inflation continued to worsen. Once again, the monetary policy stance provides an alternative explanation for the genesis of stagflation" (Robert B. Barsky, University of Michigan, NBER, and Lutz Kilian, University of Michigan CEPR, A Monetary Explanation of the Great Stagflation of the 1970s, fordschool.umich.edu/rsie/workingpapers/Papers451-475/r452.pdf, January 27, 2000).
The prominent characteristic of these stockmarket rallies was a low-interest rate policy as a response to economic/financial crisis.
Stockmarket rallies began toward the end of the 1929-32 and 1973-75 recessions providing good buying opportunities. This suggest that a 'good-buying' stockmarket rally has begun.
The Hoover recession was more severe than the Roosevelt recession. There is some debate over the severity of the Nixon and Regan recessions:
"... considering which was the most severe recession in the postwar period. Based on the maximum decline in real GNP, final sales, or the coincident indicators, or the increase in the unemployment rate, the answer is clearly the 1973-75 recession. However, because the major 1981-82 recession came only a year after the 1980 recession, the capacity utilization rate in manufacturing fell to a postwar low (70 percent) and the unemployment rate rose to a postwar high (10.8%), well above its 1975 peak" (Stephen K. McNees, ibid, p.105).
In an inflation-adjusted Dow Jones, based on yearly prices, the 1982 low was below the 1974 low (David Chapman, A Depression or Not A Depression, 321gold.com, November 24, 2008).
"The financial crisis and recession are reversing a 30-year trend carrying Americans toward a high point in debt. The ratio of consumer debt to the nation's total economic output rose to 97 percent in the first quarter of this year from 45 percent in 1975" (Neil Irwin, The Signs Don't Point To a Typical Recovery, washingtonpost.com, August 17, 2009).
The seventies was not an excessive debt-purging experience, so that it is not the best 'rhyme' to view the severity of the future recession/s.
The ballooning of government, corporate and household debt began in earnest in the early 1980s. The next recession will be as severe, or severer, than the Hoover recession reducing debt and bringing down "levitated asset prices, incomes, corporate earnings and government receipts" of the debt/credit fueled post 1982 recession disinflationary world boom.
Time-frame?
How long will this period of economic/financial trouble last? A 'rhyme' between the 1930s, 1970s and Today may provide some clues:
October 1929 Dow valuation and nominal high marks the beginning of economic/financial trouble with June 1938 the trough of the Roosevelt Recession marking the end. (The next recession began in February 1945, after an 80 month expansion, coinciding with the end of WW2). This time of trouble, 1929-38, was roughly nine years.
January 1973 Dow nominal high marks the beginning of economic/financial trouble with November 1982 the trough of the Reagan Recession marking the end. (The next recession began in July 1990, after a 92 month expansion, coinciding with the end of the Cold War). The time of trouble, 1973-1982, was roughly ten years.
(If taken from the October 1973 Dow high, that preceded the beginning of recession by month it was roughly nine years. The October high was only down 6.14% from the January high; and it was higher than December 1968 the peak of the go-go rally).
October 2007 Dow nominal high, two months before the start of a recession, marks the beginning of economic/financial trouble, with a trough in a recession ending nine to ten years later in 2016-17? With the end of an expansion, of around 80-92 months, coinciding with the end of another major war?
From the Dow valuation high of 1966 to the nominal high of 1973 it was roughly seven years. From 1966 to the trough of the Reagan recession it was roughly 17 years.
From the Dow valuation high of 2000 to the nominal high of 2007 it was roughly eight years. 17 years from 2000 is 2017?
(The Dow rallied from 2002 to 2007, a period of five years. But the Dow rallied roughly two years from 1970 to 1973 but if the "go-go rally" of 1966 to 1968, the 'Nasdaq' rally of the 1960s, is added to the former, significant rallies occurred over four years).
Contraction
|
Expansion
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Contraction
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1929-1933
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1933-1937
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1937-1938
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1973-1975
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1975-1980
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1980-1982
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2007-2009
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2009-????
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????-????
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Now back to the third bubble.
History suggest that the next stockmarket rally will be accompanied and reinforced by a bubble just as the 2002-2007 stockmarket rally was accompanied and reinforced by the housing bubble.
"Our federal government has set a course to issue Trillions of Treasury securities and guarantee multi-Trillions more of private-sector debt. The Federal Reserve has set its own course to balloon its liabilities as it acquires Trillions of securities. After witnessing the disastrous financial and economic distortions wrought from Trillions of Wall Street Credit inflation (securities issuance)... the critical issue is whether the Treasury and Federal Reserve have set a mutual course that will destroy their creditworthiness - just as Wall Street finance destroyed theirs" (Doug Noland, Mistakes Beget Greater Mistakes, prudentbear.com, March 20, 2009).
History also suggest that a third act of the Bubbles is required to reach the debt saturation point of the upwave of the present cycle. Once reached the markets will enforce the restructuring of the global economy, without too much interference from a badly weakened Federal Reserve and Federal Government.
The Global Government Debt Bubble
"It was, after all, post-Russia/LTCM "mopping up" that fueled the tech Bubble, and then the post-Tech and 9/11 mopping fostered the Wall Street/mortgage finance Bubble. And the latest big mop up job sets the stage for perhaps the greatest Bubble all them all - the Global Government Finance Bubble" (Doug Noland, And No Dialing Back, prudentbear.com, September 11, 2009).
"It is the biggest peacetime fiscal expansion in history. Across the globe countries have countered the recession by cutting taxes and by boosting government spending. The G20 group of economies ... have introduced stimulus packages worth an average of 2% of GDP this year and 1.6% of GDP in 2010" (The Economist, Much ado about multipliers, economist.com, September 24, 2009).
""Uncle Sam Bets the House on Mortgages" was the headline for an insightful article in this morning's Wall Street Journal (Peter Eavis). It would as well make a good title for recent Z.1 Flow of Funds reports. My bet is that this massive government intrusion into mortgage finance eventually backfires. It puts Washington on course for bankrupting the country, while doing little to direct financial and real resources in a manner to spur needed economic restructuring" (Doug Noland, Q2 2009 Flow of Funds, prudentbear.com, September 18, 2009).
"When Bush's first treasury secretary, Paul O'Neill, warned the vice-president Dick Cheney against tax cuts because of the looming deficit, Cheney said: "Reagan proved deficits don't matter."
"O'Neill's resistance cost him his job. Of course, he was right. The deficit has emerged starkly as a vulnerability of the US state. It was in Reagan's term that the US went from being the world's major creditor to becoming its biggest debtor.
"Bush, his ideological and political heir, has left the US, at the end of a boom, with a deficit of half a trillion dollars. To fight off recession, Obama is putting the country into much deeper deficit" (Peter Hartcher, China flexes, and the US catches a chilly reminder, smh.com.au, March 17, 2009).
"During this period [end 1995 to end 2007], Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. Federal debt expanded "only" 41% to $5.122 TN" (Doug Noland, A Week of Big Numbers, prudentbear.com, February 27, 2009).
The above suggest that Federal debt has to match the excesses of Household and Corporate Debt. The Federal Reserve "Flow of Funds" 4Q 2008 recorded that:
"Federal government debt surged at an annual rate of 37 percent in the fourth quarter, similar to the third-quarter pace. In 2008, federal government debt rose more than 24 percent, after a 5 percent increase in 2007."
Doug Noland provides an overview of the government debt bubble, which complements the above argument:
"Despite today's histrionic fixation on 'deflation,' current dynamics have some similarities to the post-tech Bubble period. Granted, the collapse of Wall Street finance is of much greater scope and consequence than the bursting of the tech Bubble. Yet I would counter that The Burgeoning Bubble in Government Finance is poised to make the Mortgage Finance Bubble appear tiny in comparison.
"There has been no run on bank deposit "money," not with the FDIC, Treasury, and Federal Reserve there to backstop confidence. The marketplace's love affair with agency debt runs unabated - compliments of federal government receivership and guarantees. Money market fund assets are right at record levels, confidence bolstered by Fed and Treasury assurances. And despite the prospect of a $1 TN borrowing requirement this year, the Treasury can still tap liquid markets for short-term funds at about 20 bps. The Fed's balance sheet has ballooned, although nothing to compare to the unfolding explosion of Trillions of Treasury borrowings, obligations and guarantees (both implied and explicit).
"The Government Finance Bubble is enormous and powerful - and should be anything but underestimated. Akin to the previous Bubble in Wall Street finance, the epicenter of this Bubble is here in the U.S. But I would argue that this unfolding Bubble dynamic has greater potential to engulf the entire world than even U.S.-style mortgages and derivatives did starting back around 2002. Welcome to the new world of synchronized stimulus, deficits, and reflationary policymaking. I don't believe true systemic deflation (as opposed to collapsing asset Bubbles) is a high probability scenarios as long as the Government Finance Bubble is rapidly inflating. All bets are off, however, if confidence in government debt falters. The worst case scenario - that should be avoided at all costs - is a massive inflation of government claims that sets the stage for a devastating bust.
"It is imperative for policymakers to ensure that the Government Finance Bubble does not follow in the footsteps of the runaway excess associated with Wall Street/mortgage finance. Yet it's clear that policymaking (monetary and fiscal) is setting a course to guarantee just such an outcome. And, as has been the case for some time now, markets are keen to fall in love with - and aggressively accommodate - whatever might be the Bubble of the Day. The Wall Street/Mortgage Finance Bubble ran to such incredible extremes that its subsequent implosion has created the near ideal backdrop for the explosion of Government Finance (as the tech implosion did for mortgage finance)..." (Doug Noland, The Government Finance Bubble, prudentbear.com, February 6, 2009).
The first chart is a truncated chart of Steve Saville's (speculative-investor.com) chart used in his article entitled What's happening on the inflation front? April 7, 2009, at 321gold.com. The second chart is a truncated chart of Steve Saville's (speculative-investor.com) chart used in his article entitled TMS or M3? June 8, 2008, at gold-eagle.com).
These charts have been truncated to make the 'rhyme' between the 1970s and Today. Recessions ended in 1970 and 2001. Dow nominal peaks in 1973 and 2007. Recessions in 1973-75 and 2007-09. Sharemarket rallies beginning in 1974 and 2009. Mild and severe recessions in 1980-82 and ????-??.
(Dow valuation peak of 1966 preceded the nominal peak of 1973 by just under seven years; the Dow valuation peak of 2000 preceded the nomimal peak of 2007 by just under seven and three-quarter years).
"On the above TMS [True Money Supply]chart we have identified three separate periods. Period A (mid-2001 through to mid-2004) had fast money-supply growth, Period B (early-2005 through to early-2008) had slow money-supply growth, and Period C, which began during the final quarter of 2008, has thus far been characterised by fast money-supply growth. The fast money-supply growth of Period A fueled rapid price rises in houses, housing-related debt securities and commodities, and the slow money-supply growth of Period B led to large price declines in houses, housing-related debt securities and (eventually) commodities. The fast money-supply growth of Period C WILL fuel rapid price rises SOMEWHERE in the economy...
"One of the main problems faced by policymakers (central banks and governments) in their efforts to manipulate the economy to their own best advantage is that they will always be able to inflate the money supply but they will never be able to control the effects of the inflation. Sometimes they will get lucky and the right things (stocks and real estate, for instance) will be the primary beneficiaries of the inflation, but at other times they will be unlucky and the wrong things (gold and oil, for instance) will gain the most ground in response to the inflation" (Steve Saville, What's happening on the inflation front? 321gold.com, April 7, 2009).
"During 1978-1979 the TMS growth rate plunged from +8% to -5%. This suggested that the commodity boom was close to an end, which proved to be the case" (Steve Saville's, TMS or M3? gold-eagle.com, June 8, 2008).
"Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.
"If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation "will get higher than it was in the 1970s," says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.
"Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That's similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon's White House to hold down unemployment, leading to the "great inflation" of that era, he says" (Rich Miller, Bernanke Bet on Keynes Has Meltzer Seeing 1970s-Style Inflation bloomberg.com, April 13, 2009).
Martin/Burns-Miller/Volcker - Greenspan/Bernanke/???? Rhyme
"After serving a term longer than that of any other Fed chairman except William McChesney Martin Jr., who held the job from 1951 until 1970, Mr. Greenspan's departure will be a historic transition. Mr. Bernanke, who is expected to be confirmed by the Senate on Tuesday, is likely to usher in a new era at the Fed..." (Edmund L. Andrews, Greenspan, Another Monument in Washington, Prepares to Leave, nytimes.com, January 30, 2006).
"Not since Arthur Burns, the Federal Reserve chairman from 1970 to 1978, has a university professor run the nation's central bank..." (Louis Uchitelle & Eduardo Porter, White House Gamble Pays for a Princeton Professor [Bernanke], nytimes.com, October 25, 2005).
"Under Arthur Burns, who chaired the Fed from 1970 to 1978, and under G. William Miller, who was chairman from January 1978 to August 1979, the Fed provided the monetary fuel for an inflation that began as a flicker and grew into a fearsome blaze... If Nixon appointee Burns lit the fire, Miller poured gasoline on it during the administration of President Jimmy Carter. Without question the most partisan and least respected chairman in the Fed's history, this former Textron executive worked in tandem with fellow Carter appointee, Treasury Secretary W. Michael Blumenthal, in pursuit of monetary policies that were expansionist domestically and devaluationist internationally. The goals were to spur employment and exports, with little thought to the dollar's value. By early 1980, inflation was running at 14 percent" (Steven K. Beckner, Back from the Brink: The Greenspan Years, (New York: John Wiley & Sons, 1996), p. 5, quoted on Wilikpedia, G. William Miller).
"1979 was a bleak year for America. The economic news was not good: soaring interest rates, inflation, and a rising foreign trade deficit led to a moribund stock market.
"Events overseas were attracting attention, particularly in Iran, where in January the Shah had been toppled and a fundamentalist Islamic dictatorship installed under the rule of Ayatollah Khomenei. By November, Islamic revolutionaries seized the U.S. embassy, taking 90 hostages.
"It was a time of malaise, [in] the Jimmy Carter era. Optimism was not in strong supply...
"Through it all, Wall Street was losing confidence in Miller. The stock market was in the midst of a long period of mediocrity. In recovering from the '73-'74 bear market low of 577 on the Dow Jones, the market had peaked at 1014 in September of 1976. From there it was a steady drip, drip down and by the summer of 1979, the market had been trading in the 800's for months. [Actually, outside of two days in November, the Dow, as measured by the closing average, traded in the 800's all year!]
"So on July 19, President Carter decided that it was time to make a change and Blumenthal was fired (as well as three other cabinet members, with a fifth resigning) to be replaced at Treasury by Miller. Then on July 25 Carter nominated Paul Volcker to be the new chairman of the Federal Reserve. Wall Street celebrated by rallying 10 points that day, 829 to 839" (Brian Trumbore, buyandhold.com/bh/en/education/history/2006/paul_volcker.html
"Volcker's Fed is widely credited with ending the United States' stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.
"The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in '81 as well.
"These changes in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression.
"Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street NW and blockading the Eccles Building" (Paul Volcker, Wikipedia).
Another Paul Volcker to raise interest rates to combat the Bernanke/Geither Fed/Treasury induced inflation resulting in a severe depression, leading not to disinflation, since the 1980s, but to deflation, like the 1930s?
A severe recession ending in a future Republican administration? Ronald Reagan, former governor of California, 1967-75, failed in the presidential campaign in 1976, but was successful in the 1980 campaign. Mitt Romey, former governor of Massachusetts, 2003-07, lost in 2008 and is running in 2012; while Sarah Palin, presiding governor of Alaska, 2006-2009, failed to become the vice-President in 2008 has yet to declare a run in 2012.