April 10, 2013 § Leave a comment
So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.
With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.
It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.
As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.
So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.
Thatcher? It was the blind leading the blind then and it’s the same now. read more