• Richard Murff

That 70's Show


Who gave Keith Hernandez a chicken?

The 1970’s were horrible in a lot of ways; for one thing no self-respecting human should dress like that. Nor did it help that the Carter administration plugged a very Weimar monetary policy. Sure, the music was pretty good, but the high-inflation pared with a stagnate economy lasted the better part of a decade. This largely explains the cocaine. These days, as inflation continues to defy the Fed and Central Banks around the world it begs the question: Do we need to break out the double-knit flares?


The simplest explanation to the current rise in prices is pretty straightforward: Too much money chasing too few goods. Pandemic spending swung wildly from services to goods, catching producers unaware at the precise moment that supply chains got crimped. Then throw-in a big dollop of stimulus on a mattress full of household savings along with the murmurings of trade war, you know, just to slow things down a bit. Once Joe Biden started carrying on that Carter’s “just print more money” gambit wouldn’t affect inflation, prices had nowhere to go but up.


And yet this seems not to have occurred to the Federal Reserve, which predicted in December of 2020 that inflation would remain at 2% over the next two years. After prices rose by 5% in 2021, the Fed revised its forecast to 2.6% for 2022. The IMF didn’t fare much better. Granted, Moscow wading it to wreck both global energy and food markets didn’t help, but doesn’t fully explain miss either. OPEC+ is having to cut production to stabilize energy prices.


In something of a post-mortem, the IMF published a report on why they were so wrong – zeroing in on three culprits: Shock, Wages and expectations. Well, without going into it, the world since 2020 has been an unending Shock-o-rama. After lockdowns, workers had to be lured back to work – a sure sign to taper off stimulus if there ever was one – and as prices had already started to climb, demanded higher wages. While it never applies to your salary or mine, higher wages to combat high prices only adds fuel to the fire, creating the dread wage-price spiral. And then there is expectations.


One of the most unsatisfying explanations for the persistence of high inflation is that we simply believe that it will persist. Without creating a vision-board to prove the point, it’s also a wildly underrated danger. Events like market crashes and bursting bubbles capture the human imagination because they go boom. The 2008 financial crisis led to reforms in the banking sector. Creeping expectations are something else altogether. We aren’t entirely sure when the creep started, so our spidey-senses never tingle. It’s the difference between dieting and starvation, or happy-hour and marriage-wrecking bouts of alcoholism. Expectations are all a matter of degrees. Prices go up and we’re stuck with it. And then they go up some more.


Which accounts for the Fed’s merciless drive upward tempered with some mollifying noises about slowing the pace of the hikes before the it breaks the economy. As the UK found out to its horror, this is not the time for a big reveal. In short, the Fed wants to get ahead of inflation, and it needs to show the world its willingness to let the global economy feel some pain in the process signals to the world to expect that it will succeed.