I just finished reading the magnificent book, THE GREAT INFLATION AND ITS AFTERMATH, by economist Robert J. Samuelson and I was going to write a long review of it.
Then I read this review of the book by New York Times editor Noam Scheiber. He just about says everything I wanted to say so why waste time?
This is an amazing MUST READ book with many lessons for the future. If you are not preparing your portfolio for the hyperinflation to come, you are either reckless or a fool---or even both.
Think about it this way. The 2009 Federal deficit is now over ONE TRILLION DOLLARS with two more months yet to run in the year---with another TRILLION DOLLARS forecast for 2010.
Where do you think the government is going to get all that money? Raise taxes in a recession? Tax the rich? (Honey, there just aren't that many anymore.)
So where does the money come from? Here's a hint. Read Samuelson's book.
Robert J. Abalos, Esq.
Cycles of Doom
Robert J. Samuelson is a conservative from a time when conservatism was more a sensibility than an ideology. His business columns in The Washington Post and Newsweek preach old-fashioned virtue on a macroeconomic scale: don’t promise more than you can deliver; weigh the unintended consequences of your actions; beware hucksters bearing easy fixes. Samuelson often directs this advice to government officials — his nominal subjects are budget shortfalls, interest rates and energy prices. But his rules are every bit as relevant to daily life as they are to public policy.
It is therefore no surprise that Samuelson would write a book-length meditation on inflation — that ultimate symbol of cultural rot masquerading as an economic problem. Inflation-racked countries scorn all the self-abnegating rituals that make capitalism work. They want their guns and their butter and they want them now. So they print money to pay for them. By contrast, low-inflation countries are committed to an ethos of scrimping and toiling that yields long-term rewards. In “The Great Inflation and Its Aftermath,” Samuelson studies the transformation of the United States from the first kind of country to the second.
The villain in Samuelson’s morality tale is a group of intellectuals who came into fashion during World War II, then came into power with the Kennedy administration. John F. Kennedy himself had sound economic instincts. But he was seduced by his chief economic adviser, a University of Minnesota professor named Walter Heller, who argued that more rational management of the economy would produce permanently higher growth. “Heller was an aggressive salesman for what ultimately became known as the ‘new economics,’ ” Samuelson writes, but he was “hardly a one-man band.” Many of the day’s leading economic lights — James Tobin of Yale and Robert Solow and Paul Samuelson (no relation to Robert), both of M.I.T. — held similar views.
At the heart of the “new economics” was a concept called the Phillips Curve, which summarized the trade-off between unemployment and inflation. The idea was that an economy could experience very low unemployment and high inflation, or very high unemployment and low inflation, or any combination therein. Heller persuaded Kennedy to move leftward along this spectrum by stimulating the economy — effectively accepting higher inflation in exchange for more jobs.
It worked for a time. The economy flourished; inflation inched up only marginally. But as the Kennedy administration became the Johnson administration became Nixon became Carter, growth stagnated and inflation skyrocketed. It was clear that, over the long term, the government could no more trade “a little inflation” for sustained growth than a drug addict could use “a little heroin” for a sustained high. Achieving the same economic payoff required ever more stimulus. Some presidents struggled to control their addictions, while others didn’t even try. “Nixon frequently reminded Burns,” Samuelson writes, referring to Arthur Burns, then the chairman of the Federal Reserve Board, “that the president’s political fortunes depended heavily on the Fed’s ability to increase economic growth.”
What the new economists didn’t realize was that inflation accelerates: workers demand raises to keep up with higher prices; companies raise prices to keep up with rising wages; the process spirals upward. The only way to break the cycle is with a deep recession, which creates vast surpluses of goods and labor. Companies with scads of inventory eventually lower prices. High unemployment makes workers less pushy.
Which is essentially what happened in the early 1980s. Between 1980 and 1982, Paul Volcker, the Brobdingnagian Federal Reserve chairman, raised interest rates so abruptly he knocked the economy out cold. But when the nation emerged from the long, dark night, its inflation habit had been kicked. The upshot, according to Samuelson, was a quarter-century of nearly uninterrupted prosperity.
Samuelson is right to highlight inflation’s central role in economic history. Beyond a certain threshold, inflation smothers growth, as people spend more time evading price increases than behaving productively. To take one example, inflation creates an impulse to spend today rather than save for tomorrow, when prices will surely be higher.
Still, Samuelson can overstate the benefits of low inflation. He claims, with little evidence, that it brought about everything from globalization to the leaner, meaner American economy of the 1990s. His causality is sometimes backward here. It’s globalization that helped produce low inflation in recent decades (not, for the most part, vice versa), as cheap foreign labor undercut workers’ bargaining power. Likewise, it was primarily globalization, not low inflation, that forced corporate America to shed its extra pounds. Beginning in the 1960s, American companies came under intense pressure from competitors in Europe and Japan, which eroded their profits and made their business models untenable.
But the bigger problem with Samuelson’s story is that it’s incomplete. Over the last decade, American policy makers — Alan Greenspan chief among them — came under the sway of the same old siren song: the belief that rational economic management could avert the pain of unemployment. And yet, the same pathologies Samuelson so shrewdly diagnoses in an earlier generation he almost completely ignores today.
In 1998, after a global financial crisis threatened the expansion he’d so carefully cultivated, Greenspan flooded the economy with cash (not crazy), then kept interest rates low for more than a year (highly questionable). The extra money led to the tech frenzy that ended so badly in 2000. Beginning in 2001, Greenspan aggressively lowered interest rates and kept them low into 2004. Once again, all the excess cash resulted in a bubble — this one in real estate — the bursting of which we’re now struggling through.
Samuelson mentions these two developments in passing, but they’re central to any account of inflation over the last quarter-century. The prices of stocks and homes are every bit as vulnerable to inflation as the prices of toothpaste and sandwich bread, even if government statistics properly account only for the latter pair. And as we’re discovering, the consequences of that inflation are every bit as damaging.Put simply, it makes no sense to scold Walter Heller without scolding Alan Greenspan. Why Samuelson fails to do so is unclear. Perhaps his definition of inflation is overly narrow, or he’s loath to complicate his historical narrative. I favor the most charitable explanation — that he wrote most of his book before the housing bubble became evident. In which case I’ll happily finish the job for him: Beware oracular Fed chairmen bearing easy fixes.