"I was too young to remember what happened back then and what led to it, but I think we can all agree that we don't want to see a repeat."
I remember it. The value of the dollar was dropping because the gold standard had imploded. High deficit spending led to the government selling bonds to cover it. When foreign investors stopped buying the bonds, the government started to raise the rates. Which reduced the attractiveness of business bonds. That put a squeeze on business investment, so productivity started to decline. Declining productivity led to stagnating wages. When not enough government bonds could be sold, the government resorted to printing money. That kicked inflation into high gear. Which made the wages thing a real problem. So people resorted to running up their personal debt to stay afloat. Which contributed to inflation because it pumped money into the economy that wasn't related to productivity. The coup de gras was when the Oil Embargo pushed energy costs up.
So, dropping dollar value, stagnant wages, high deficits, high debt, high energy costs. About like now, only not as bad. All we really need is high inflation to round out the scenario. And we get that when we can't sell our government bonds to foreign investors. And that is going to happen if the dollar drops more. There already is a move away from the dollar for a variety of things. Israel, for example, wants its foreign aid in Euros now.
Now, you can join Tim and dance around the maypole singing "it is really different this time". And it is. But not all to the good. The stagnant wages was cushioned back then because wages were relatively higher for the typical standard of living. And when that cushion ran out, the wife could always get a job. That really helped during the 1980s where we grew our productivity by slaughtering middle management with the PC. That, combined with modest wage increases during that time, helped the economy take off. But if we belly flop again, we can't put wifey to work, she is already there. And we can't squeeze a lot of people out of their jobs to boost productivity. So the recovery will be a lot more painful and slower.
Personally, I am baffled why we are hell bent on revisiting that scenario. It sucked the first time around, and there is no reason to expect it won't suck even more this time. In addition, there is no reason to believe it won't happen again. We should know better, but we apparently don't. |
