Saturday, March 26, 2011
Inflation rate in USA 1960-2011
I must not have much to do, I thought it might be nice to think of a
little financial history. The market hubbub of late is ripe with opinions
and pontification on the future of our economy, especially the
devaluation of the dollar. As a currency’s value falls, it Is natural
more of these dollars are required to purchase goods and services.
A classic definition of inflation if ever there was one. It is my
understanding that the US inflation rate is inexorably tied to the
interest rate. This ‘monetary policy” is set by the Federal Reserve.
During my short life there have been only 6 of these esteemed Fed
chairmen.
For the period 51-70 we had Fed chairman
William McChesney Martin, Jr. He served
under Truman, Eisenhower, Kennedy, Johnson,
and Nixon. Inflation was mostly stable (1% to 3%)
until 1968, it then started a dramatic rise. 19 years of stability.
Arthur F. Burns came onboard in Nixon’s
second term, 1970 until 1978. That took us
thru Gerald Ford and Carters first term.
Inflation really was nuts, 6%,4%,3%,
6%,11%,9%,6%,7% during his tenure.
Inflation really was nuts, 6%,4%,3%,
6%,11%,9%,6%,7% during his tenure.
G. William Miller lasted 6 months before
He was tapped for the job at Treasury.
He was tapped for the job at Treasury.
Hard to blame him for anything at the
Fed, but his Keynesian belief at treasury
Sent the dollar down 34% in a year.
Carter and did a term with Reagan. He
surely saved the financial system in this
country. His first 3 years were 11%,14%,
And 10%, thereafter tapered off greatly.
Alan Greenspan came in Reagan’s 2ndTerm,
staying thru George HW Bush,
staying thru George HW Bush,
Bill Clinton, and George W Bush. The
19 years (1987-2006) saw the level
decrease from 5% then hold in the 2%
to 3% range.
And here we come to Ben Bernanke,
a Bush 2 appointment, he serves even
a Bush 2 appointment, he serves even
to the present. The data shows we have
gone from a nominal 3% to deflation,
only coming up to 1% last year.
The interest rate follows/drives the inflation rate, and we are
in a time, like under Miller, that the money supply has been
expanded greatly. As the chart demonstrates, we have been
in a relatively stable inflationary period for 2 decades.
Under his leadership, “helicopter Ben” as he is known for dropping
large amounts into the money supply, the goal is to reduce the size
of our debt relative to the now bloated supply. Thus, the theory goes, keeping interest and inflation low. This is a good theory,
but I remember our old friend Mr. Greenspan once said ~ When
we make even a small move at the Fed, I can feel the very
foundations of the building shake.
Finally, these are not small moves, QE1 + QE2 with #3 on the way
This shows ~ 8 trillion $ around double in just 10 years.
All of this looks rather benign until one looks into a
part of the money supply that sits in an obscure nook,
that is the synthetic money in currency and credit
derivatives. That number is ~ $ 574 trillion. I only worry
of unintended consequences and oversights because it
appears we have built an extremely large construct
that depends for balance on a moody population. If
the system breaks down in some way, what is plan B?
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