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Quote of the Day: Inflation
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” — Ronald Reagan
I graduated from college and began my career in 1979. Inflation had been out of control since the first oil shock in 1973. Jerry Ford, despite a well-intentioned attempt to Whip Inflation Now, had not.
Salaries for graduating engineers had been on an escalator since 1973. That year the average graduate with an engineering degree was getting an average annual salary of about $12,000. My first job paid $18,500 in 1979. Even that was not enough to keep up with inflation during the Carter years, when Jimmy simply gave up on taming inflation. Mortgage interest rates soared from 8% for a 30-year fixed to 12.5% when Janet and I bought our first house in 1980. At that, we counted ourselves lucky. A month later, it briefly touched 18%.
For a couple starting out of college, inflation made everything difficult. We did not have student loan debt. (Yes, children, back then you could go to an “expensive” university like the University of Michigan-Ann Arbor and pay for it with part-time and summer jobs. Tuition was still reasonable. Griggs was new enough that colleges had not yet realized how much they could jack up tuition rates.) With a house and car loan, and inflation relentlessly raising prices, it was almost impossible to save. We did save some, freeing the money by eating fry bread and beans a lot of meals. But even there, you would put it in the bank and watch it shrink.
One of the things that Reagan did that made him great was to actually tame the inflation dragon. It was painful. (That was part of the reason for the 18% mortgage interest rates.) There was a recession that lasted almost two years. But he had the courage to do it, and two years after that, by 1984, it was Morning in America rather than Orwell’s Oceania.
Despite the good economic times that followed, Janet and I did not fully recover from the bad start forced on us by the 1970s inflation until 2011, over 30 years after I entered the workforce. We were severely hampered by a lack of working capital and savings. We had some, but only enough to cover a short period of unemployment. We had to forego a lot of investment opportunities because it would tie up money we needed for emergencies. Not that we were living on beans and fry bread, but we had to be really careful with money since our financial safety net was inadequate. Our friends a few years older or younger did not experience the same issues. Lower inflation rates in the early-’70s and mid-’80s meant they could actually accumulate an early career nest egg.
I see this happening again. I cannot say I am completely inflation-proof today, because inflation will reduce the value of my savings and salary. But I can say it is unlikely to keep me from living the lifestyle to which I have grown accustomed, due to low debts and high accumulated assets. Similarly, my adult children have their careers launched and have the financial airbags that Janet and I lacked at that stage of our lives.
Still, I worry about its effects on those just starting, folks like Janet and me in 1979, that want to work hard, start families, and seek their piece of the American dream. I wonder how badly inflation will blight their efforts. What is worse, when it comes to inflation, Biden is not taking the steps necessary to contain it. Instead, he is ignoring it, like someone who had early-stage cancer and won’t go to the doctor until it is too late to treat.
Reagan tamed the inflation dragon. Biden is feeding it.
Published in Group Writing
Those were bleak times.
I think I came out of it OK, but only by luck and persistence.
By the way, I did not finish college, but I paid off my loans as a junior enlisted member of the USAF.
Inflation actively discouraged saving. Nearly anything you might want to buy was cheaper now than it would be by the time you saved enough for it. And at times stores would have a “sale” on money—buy that furniture today and pay it off over time at 5% when saving a year for it would cost you 6% of the money you had today, and the price of the furniture would be 10% more next year.
The effect on the economy and more importantly, on psychology, was to heavily discount the future. Nearly everything became disposable, and then cheaply made, and then the same corrosion started on personal relationships and society in general. “Eat, drink, and be merry; for tomorrow we die,” was the unofficial motto of the ‘70s. Or perhaps, the hipper, “If it feels good, do it.”
Mr Reagan knew what he was up against. His decision to back Paul Volker’s plan to choke off inflation was one of the greatest acts of political courage in history, the resulting recessions were hard, but necessary, and it could have ended his Presidency.
My wife and I have a similar story from the late 70s. When we graduated from college the county we lived in had nearly 30% unemployment. Kevin Williamson’s advice to relocate was not in the cards for us. You got to have money to move.
Lockheed (the company that hired me out of college) paid for our move to Houston. Otherwise we could not have afforded to leave Michigan (then ground zero for the economic neutron bomb that had gone off). I don’t think that is done much any more, even for engineers.
Griggs does show up in the labor Econ literature as a factor that increased the demand (and price) of a college degree. There were also demographic trends that increased the demand, that allowed tuition to rise many times faster than core inflation. Education was the best way to complete in the job market against old Boomers for young Boomers and Gen X-ers.
Education was also the best way to keep younger boomers out of the job market.
Inflation also resulted in colleges and universities becoming addicted to rapidly increasing tuition and fees.
He’s not ignoring it. He’s just moved on to smoking unfiltered Camels.
Fighting Inflation in 1979 was far simpler than today.
The national debt and the debt ratio were a mere fraction of what they are today.
Volker had room to raise rates. The unions had demanded that rates be low throughout the Carter years. When Volker came to office the prime rate was 9% and inflation was over 11%. I should know; with two partners we went into escrow on a four unit in Hermosa Beach at positive cash flow with rates at 9% before Volker came into office. When escrow closed under a couple months of Volker we were paying our mortgage at 11% at negative cash flow.
Inflation fighting is far different today.
The national debt is so high raising rates will send the debt service of the national debt out of sight. So pulling a Volker is out of the question.
But beyond that, today’s inflation is a much more complex problem:
• Since the beginning of the Pandemic the FED printed an unbelievable $6 Trillion in QE to cover the massive spending of Congress and Biden for Pandemic relief.
• While some of the most obscene spending practices of those years are gone, the Federal Budget deficit is likely still to be around $2 Trillion this year far above what can be covered by the selling of treasuries, so there must be more inflationary QE money printing which will inflate the money supply and inflation even further.
• The long term regular policies of the UniParty depress growth and are distinctly inflationary making housing, energy, food and manufacturing much more expensive than they should be.
• The new even more radical “Green” anti-growth policies of the Biden Administration have made housing and energy substantially more expensive, and cancelation of college debt doesn’t help either.
• But one of the most serious problems are the consequences of the Ukraine War which has likely permanently disrupted the supply chains of natural gas, oil, fertilizer, many other raw materials and many other critical industrial components as well as pharmaceutical drugs causing an intractable “supply side” inflation problem that cannot be effectively cured by raising interest rates or limiting the money supply. The prices of some key components in our economy because of their worldwide scarcity will likely by high for the foreseeable future no matter what the FED does.
The causes of inflation can be broken down into two main causes:
• Demand Side; which means the demand by consumers for products can be curtailed by raising interest rates and the cutting the money supply which will likely cut into inflation .
• Supply Side; this inflation is caused by the scarcity of products and higher material costs. Raising interest rates does very little to affect his problem short of completely collapsing the economy. To address this problem the policies that created this scarcity of products and raw materials need to be addressed which is why when people say inflation is purely a monetary problem they are really failing to address the real problem.
Inflation is always and everywhere a monetary phenomenon. Thus spake Milton Friedman. And he’s absolutely correct.
If interest rates were free to react to the unprecedented amount of US Treasury borrowing, interest rates would SOAR.
Back in the 80’s I was a bank teller. I have a vivid memory of opening a 21% CD for one of our customers.
cEntRal pLAnNing MakEs oUr liVEs beTTEr
Reportedly, the intervention makes our lives better.
“Conservatives” fall for this crap.
I hope you refinanced that at lower rates, at every opportunity.