It’s Not 1970 Or 1980

Authored by Robert Aro via The Mises Institute,

It’s closer to 2023, yet, we’re constantly reminded how the Fed has learned from the Volcker era, therefore knows how to steer the economy in the right direction. Nothing could be further from the truth.

On Tuesday St. Louis Fed President James Bullard told CNBC that the economy can still avoid a recession and that rates will likely “have to go to 3.75% – 4% by the end of 2022,” in order to fight (price) inflation. He continued by drawing comparisons to over 40 years ago, as reported:

Bullard compared the Fed’s current situation to the problems central banks faced in the 1970s and early ’80s. Inflation is now running at the highest points since 1981.

In the time-honored tradition of throwing one’s predecessors under the bus, claiming this time will be different, Bullard said:

Modern central banks have more credibility than their counterparts in the 1970s.

According to him, it’s this credibility that the Fed and European Central Bank:

…may be able to disinflate in an orderly manner and achieve a relatively soft landing.

He bases his confidence on the Fed’s “credibility,” as if this determines what causes recessions or cures periods of high inflation. The article tries to explain his theory:

But Bullard argued that the ability for the Fed to steer the economy toward a soft landing rests largely on its credibility, specifically whether the financial markets and the public believe the Fed has the will to stop inflation. He differentiated that from the 1970s era when the Fed enacted rate hikes when faced with inflation but quickly backed off.

It’s quite the explanation! However, it offers little confidence that anyone at the Fed knows what they’re doing, appealing to the passage of time and hope for a better future, more than anything.

Bullard makes a final plea to this fabled credibility as the difference maker:

That credibility didn’t exist in the earlier era… We have a lot more credibility than we used to have.

Unfortunately, it will take a lot more than credibility to get the economy out of its current (or upcoming) recession and bust cycle. Displaying little knowledge of the Austrian Business Cycle and how changes to the money supply alter the structure of production causing the boom/bust, it will be difficult for the Fed to “do the right thing,” which would simply be leaving the economy alone.

The on-going comparisons between now versus several decades ago is worrisome. Considering the national debt in 1981 was still under $1 trillion, but now is over $30 trillion, it’s disingenuous to say 2022 is the same as 1981. Still, one might argue that it’s all relative, and GDP has grown since then.

Despite the problems with GDP, looking at the debt to GDP ratio shows something troubling, making the comparison between now and then even more difficult to support:

Between 1970 to 1980, the debt to GDP ratio hovered around 35%. By comparison, today’s ratio is at 123%! Very roughly, if the national debt were closer to 7 to 9 trillion dollars, we could say it has grown consistently with GDP. But we cannot say that. Either the national debt has drastically exploded, GDP has inexplicably shrunk, or a combination of the two.

Beyond that, it’s exceedingly difficult to believe that any central banker or government official learned anything from 40 to 50 years ago, since they’ve done nothing except take on more debt and increase the money supply every year in as much time; if they really learned, then inflation would never have gotten this high to begin with. Technology is different. The Geo-Political landscape is also different. The accumulation of all debts, past inflations, price valuations, and malinvestments over time are now all combining to increase the severity of the next bust.

Other than “high inflation” now and “high inflation” then, and the hope to lower the rate of price increases, it’s best to believe that the Fed steers this ship without a rudder. Since little comparison can be made to now versus half a century ago, it makes little sense to cite this period pretending like our new central planners are more advanced, learned, or better than their predecessors.