by Fast Rope
The late Robert Wenzel knew exactly how bad inflation was going to get. He would not be surprised at all that the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) has officially reached 7.5 percent. In fact, he predicted it with amazing precision. It’s as though Wenzel had an economic crystal ball!
If you want to understand what’s really going on with inflation, and where we are likely going, I highly recommend his 19-minute video (above) The Three Kinds of Inflation That Are Going to Blow Overall Price Inflation Through the Roof. Wenzel describes several kinds of inflationary forces that are acting in unison, but ultimately rooted in the profligacy of Federal Reserve and the massive expansion of money and credit.
Two months before his untimely death, Robert also penned the following in his priceless blog the Economic Policy Journal predicting the inflationary mayhem to come (emphasis mine):
Thursday, March 25, 2021
The Eerie Similarities Between Price Inflation in the 1970s and What is Developing Now
I don’t know what more I can do to put out a warning. All indications are that a serious price inflation is about to hit. As I have written before, price inflation of 3.0% appears to be in the bag (and will hit very soon). Price inflation of 5.0% is very likely and price inflation down the road of 10.0% or more can not be ruled out.
Bizarrely, none of present-day policymakers at the Federal Reserve seem concerned. They look back only 10 years or 20, see no serious price inflation and think it can’t happen.
But if you look back to the 1970s, you can understand how bad things can get and why things are very similar.
William N. Walker, who was general counsel and deputy director of the federal Cost of Living Council, 1972-74, understands what is developing.
He writes in The Wall Street Journal:
The last bout of inflation the U.S. experienced was in the 1970s. Commentators duly note this historic reference but don’t really understand it—many weren’t yet born, and few were adults, at the time. It was no mere inconvenience; it was a catastrophe.
During the first quarter of 1973, consumer food prices shot up at an annual rate of nearly 30% and the wholesale price index for farm products rose at an annual rate of 52%. Red-meat prices surged at an annual rate of 90% during the first quarter. Home heating oil prices nearly doubled in that quarter alone, and soybean prices rose to record highs.
The Journal reported recently that “commodity markets are roaring” and noted dramatic increases in prices of crude oil, copper and nickel as examples of what some predict to be “a supercycle . . . when prices of livestock, grains, metals, oil and gas all climb for years, even decades.”
That article that could have been written in the spring of 1973, when demand also exploded, putting such severe pressure on supplies that within a matter of months, prices of virtually all commodities—foodstuffs, minerals and petroleum—would soar. By the summer, the rate of inflation had shot up to 11%. It would continue at near double-digit annual rates until 1980, when the Federal Reserve, led by Paul Volcker, raised interest rates to nearly 20%. That crushed inflation but ushered in a harsh recession.
There are eerie parallels today. In 1973, the U.S. was coming off a two-year experiment in wage and price controls, which artificially depressed prices and muted signals that the economy was overheating. Then, too, the Fed pursued an easy-money policy, keeping interest rates low—though considerably higher than now, and without today’s purchases of bonds and mortgage securities.
By the end of 1972, before the inflationary jump, the U.S. economy seemed even stronger than it is now, growing at an annual rate of more than 8%. Unemployment was down to 3.4%, and inflation was a seemingly manageable 5.6%. The pre-pandemic 2020 U.S. economy was also very strong, growing at a 3% annual rate, with historically low unemployment of under 4% and inflation hovering around only 1%.
In 2021 we’re emerging from the pandemic shutdown, which cratered growth and slammed the economy—depressing price pressures, not unlike what the price-control program did 50 years ago. Today’s Fed policies are even more expansive. And Congress has just enacted a $1.9 trillion stimulus bill—on top of earlier relief bills costing another nearly $2 trillion, a lot of which remains unspent and will continue to fuel demand this year and beyond.
Does that mean that we’re doomed to repeat the earlier disaster? Today’s fiscal stimulus clearly dwarfs anything even considered in the 1970s. Moreover, there is a palpable excitement that Americans will finally be able to discard the shackles of Covid and spend the money they saved last year and the wages they’re starting to earn again. So demand is likely to soar.
As was the case 50 years ago, there are constraints on supplies: shipping delays are blocking deliveries; manufacturers can’t get parts to ramp up production; real-estate values are skyrocketing, while lumber shortages constrain home building; and most commodity prices are rising precipitously. Experts reassure us that the annual inflation rate will rise only to about 2%. We hope they’re right, but when demand increases faster than supply, prices tend to go up.
Once again, I need to emphasize this point, current Federal Reserve monetary policymakers are acting completely irresponsibly with their continued massive money pumping and monetization of federal government spending. They seemingly have no idea what is about to hit them.
This is not going to end well.
Editor’s Note: I deeply miss the economic and liberty-minded musings and analysis of Robert Wenzel. His understanding of the free markets, liberty, economics, and the Federal Reserve were second to none. Moreover, he was truly unmatched in his uncanny ability to apply Austrian Economics to investing. You can watch many of his excellent videos on YouTube for free. You will come away with the equivalent of a master’s degree in economics. RIP Bob.