Sunday, September 19, 2010

Inflation and the 1970s

In a lazy-Sunday mood, my mind is wandering back to the 1970s, assisted in its wandering by a recent book, RIGHT STAR RISING, by Laura Kalman.

Kalman's book covers the period 1974 to 1980, a period that began with the resignation of Richard Nixon and ends with the election of Ronald Reagan. How did we get from one to another? One might reasonably have suspected, a priori, that Nixon's fdall would signal a leftward move in the country's politics. Why did that not happen? That is the question that fascinates Kalman.

What I have read of her book has forcefully reminded me of the centrality of inflation in the politics of that period: inflation at levels we have not known since, and inflation that came to be taken for granted year-to-year. Ford declared that we could stop it, and introduced ridiculous WIN buttons. The inflationary environment stimulated more serious policy disputes, such as that over common situs picketing.

So let's think about inflation today. With all the "quantitative easing" and stimulus packages of the last couple of years, shouldn't we have expected some of late? Why has it remained so tame in 2010? Here's a take from The Motley Fool back in March.

One reason it has remained tame is simply that other currencies have taken harder hits than the dollar, and this has allowed the dollar to retain its significance as a safe haven. Switzerland, and its franc, has long been considered another safe haven, but its status as such took some hits in 2009, because the Swiss economy is so closely tied to world banking, and banking as an industry was so much under siege. For investors even nervous about Switzerland, the US dollar looked even better. (Sort of like the way the girls [boys, if you prefer!] all look cuter at closing time?)

Of course the safe-haven notion increased demand for the dollar, and the increased demand has kept its value up, i.e. has foiled the forces that would otherwise have pressed for inflation/devaluation.

But I think we've gotten as much mileage out of that as we're going to get, and we may be headed back to the '70s sans DeLorean.

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