Stagflation makes the front pages
It's as if the editors of the New York Times and the Wall Street Journal held a joint editorial meeting yesterday. They looked at the CPI numbers along with the Fed's growth forecast… and together concluded that 70s-style stagflation is staging a comeback and the story deserves front-page treatment — above the fold in the WSJ, below in the Times.
Now ordinarily, this is enough to set off my contrarian radar, along the lines of Business Week's infamous "Death of Equities" cover just before the start of an 18-year bull market in stocks. But the meme of the day actually appears to be that this time is different:
The biggest difference is that in the 1970s, the Fed
was unwilling, or thought itself unable, to bring inflation down. The
Fed today sees achieving low inflation as its primary mission.
"The reason we're so unlikely to see a repeat is we're
not adding irresponsible policy," says Christina Romer, an economist at
the University of California at Berkeley and a historian of Fed policy.
That means if the Fed is wrong in thinking inflation's recent rise is
temporary, it will tolerate economic weakness in order to get inflation
down again. "They'd have to let us suffer for a while."
Methinks Professor Romer needs to reread Ben Bernanke's helicopter speech.
Meanwhile a sidebar story on the inside pages of the Times takes a different tack on the "this time is different" angle, insisting without actually saying so that inflation and stagnation are mutually exclusive, and in any case, the Fed has near-unlimited powers to fine-tune the economy:
Like the Fed, economists generally remain more concerned about the
immediate threat of recession than the more distant fear of higher
inflation. Recent data suggests an economy that may be in a downturn or
close to it. The consensus view is that the expected slowdown is likely
to create enough spare capacity to suck inflationary pressures out of
Moreover, even if some additional inflation is a
side effect of the Fed’s prescription, many economists say, it sure
beats the alternative. Once the interest rate cuts have nursed the
economy through the next few difficult quarters, they say, the Fed can
easily raise rates again to respond to any pickup in inflation.
“They are going to fix the wound now,” said David Durst, chief investment strategist of the Global Wealth Management Group of Morgan Stanley. “They are going to take care of the growth situation and then fight inflation when the economy gets stronger.”
Actually, that sounds like a pretty likely scenario. But at some point the boom-bust cycle has to reach an ugly end — or as Mises called it, the "crack-up boom."