The Return of ’70s Inflation or ’30s Deflation?
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Editor’s Note: Bill Bonner wore a brown polyester shirt in the ’70s. The polyester shirt is gone, but ’70s-style inflation is back. So is ‘30-style deflation, says Bill. The Fed is doing it’s best to combat deflation by juicing up the markets with more easy money. But in doing so they’re pushing the price of commodities through the roof…
Bill could be right. He’s certainly in good company. Warren Buffett is worried that the US is in the grip of stagflation.
“We’re right in the middle of it right now,” said Buffett in an interview on Bloomberg Television today. He also said “the ‘flation’ part will heat up” and “the ’stag’ part will get worse.”
However, “stagflation might not be the bogeyman for stock and bond markets that it’s cracked up to be,” says Canada’s The Globe and Mail.
The newspaper is referring to a report by Tobias Levkovich, a chief equity strategist at Citigroup Global Markets Inc. in New York. Levkovich has looked at periods of stagflation over the past 40 years and returns during those years by various investment asset classes.
According to The Globe and Mail: “He found that U.S. stocks and bonds were actually top performers during those periods, outpacing gold, oil, industrial commodities and residential real estate.”
Stayin’ Alive in the New ’70s
By Bill Bonner
People who believe that history repeats itself are asking themselves: Is this a rerun of the ’30s…or a replay of the ’70s. Is it a deflationary recession we’re rehearsing? Or an inflationary recession? How is this story going to turn out?
We look around. We don’t see any breadlines… and people aren’t dressed nearly as well as they were in the ’30s. But now people get their free food through plastic “Independence” cards… proving that they are 100% dependent on the taxpayer for their daily bread. And as for dress… what do we know? If people like wearing flip-flops, pedal pushers, and shirts with reptiles on them, does that change the plot or alter the outcome?
It doesn’t look like the ’70s either. No afro hairdos…no muscle cars…no polyester shirts. (We had one…a brown one with white stitching. It clung to our manly, young body and almost electrocuted us each time we took it off. Elizabeth threw it away the first time our back was turned.)
Still, the economy is beginning to look a little like the ’70s.
“Stagflation fears vexing Bernanke,” says the Chicago Tribune.
“Spectre of inflation returns to global economy,” adds a front-page headline on the Financial Times.
In the following reckoning we don’t disagree. But we add a much-needed nuance. Not only is the spectre of ’70s inflation haunting the economy…so is the spectre of ’30s deflation.
Check out this headline: “Biggest drop in housing since Great Depression.”
Yes, dear reader, get ready for a whiter shade of pale, as the two apparitions join in a ghostly hullabaloo. To the question — which will be have, inflation or deflation? — we have consistently replied, ‘both.’ And la voila — here they are.
But we’re no longer alone in this opinion. Yesterday, the world’s greatest investor and richest man, Warren Buffett, agreed with us.
“Stagflation,” he said, was becoming a bigger and bigger problem. “I think the ‘flation’ part will heat up and the ’stag’ part will get worse.”
The Financial Times saw its inflation ghost in the huge price increases announced by Dow Chemical (NYSE: DOW) and South Korea’s Posco (NYSE: PKX). The former is America’s biggest chemical group; the latter is the world’s fourth biggest steel maker.
Meanwhile, said Mr. Charles Holliday, CEO of Dupont (NYSE: DD), and not putting too fine a point on it:
“Inflation is here big time.”
You think you’ve seen inflation, said a spokesman for mining giant BHP Billiton (NYSE: BHP). You ain’t seen nothing yet. On Monday another mining group, Rio Tinto (NYSE: RTP) announced a price increase of 96.5%. Billiton said that even that would not be enough; it signaled a price increase of over 100%.
“Now,” as Crocodile Dundee might have put it, “that’s inflation.”
“The sustained rise in the price of oil and commodities has hammered industries such as airlines and carmakers, and deepened fears of a global inflationary spiral as producers pass on higher costs to manufacturers and consumers,” the FT figures.
The Reuters CRB index is up 45% in the last 12 months. So far this year oil is up 42%. Natural gas has risen 76%. Corn has popped 58%. Soybeans 26%. Base metals are up about 30%.
Buffett is right…the ‘flation’ part is heating up. You see it in the newspapers, the check lines and, prominently, at the gas station. But what about the ’stag’ part?
Little noticed among all the noise and smoke is the way the two ghosts — of ’30s deflation and ’70s inflation — join forces. As we explained yesterday, expensive energy is destroying the suburbs. That’s not all, as Americans are forced to pay more for fuel, they pay less for other things. The whole retail sector suffers. And much of the hospitality industry; this year Americans are planning on taking ’stay-cations.’
The Fed tries to jolly things up with more money and credit, but what happens? Oh, cruel, cruel fate! The money feeds into other economies… and into the prices of commodities. Then, as fuel, food, and raw materials bills go up… the extra expenses weigh down the economy like a concrete block tied to a corpse in the East River.
Yes, dear reader, the ghost of ’70s inflation frightens the economy… only to be followed by the ghost of ’30s deflation. Between the two of them, they’re going to scare the living daylights out of us.
Source: Stayin’ Alive in the New ’70s
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Tags: BHP, Bill Bonner, DD, DOW, Fed Rate Cuts, PKX, RTP, stagflation, Us Inflation Rate, US recession, Warren BuffettAbout the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning and three best-selling books, Financial Reckoning Day: Surviving The Soft Depression of the 21st Century, Empire of Debt: The Rise of an Epic Financial Crisis and Mobs, Messiahs and Markets..
The Daily Reckoning offers a "uniquely refreshing" perspective on the global economy, investing and the ability to live well in uncertain times. You will learn what you can expect from today's markets and how to prosper in the face of uncertainty.