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.

Ben Stein's "trader realism"

In The New York Times this Sunday, Ben Stein has explained market volatility in a conspiracy-theorist spirit.

Stein isn't the type of guy who stocks up on canned food and worries about the black helicopters of the UN. He's perhaps best known as an actor (having played Ferris Bueller's teacher, having hosted game shows on television etc.) but he seems to think of himself more as an economist in the line of his father, Herb Stein, who chaired the council of economic advisors under Presidents Nixon and Ford.

At any rate, Stein seems to have carved out a niche for himself somewhere in between the worlds of financial punditry and entertainment. The actor who can discourse eruditely about economics, the finance pundit who can play a role.

His column Sunday begins with a personal note -- he reminds us that he is Herb Stein's kid, and tells us that when he was a child monetarism was a subject for dinner table discussion, over the meatloaf.

From this we seque to his law school education, to his absorption of the ideas known as "legal realism," and from there at last to the point. He has decided that what economics/finance needs is the sort of veil-piercing that the realist scholars brought to the world of law.

I once wrote a book which was largely devoted to the defense of formalism against realism within jurisprudence, so I guess I'n not the audience Stein had in mind when he introduced his conspiracy theory in this roundabout way.

If you'd like to read the column itself, please do sohere. I'll describe the theory to which his effort at veil-piercing has led him tomorrow.