Quote of the day: Stagflation & the 1970s

Is it kosher to make myself the quote of the day?

“I find it funny that people who didn’t think there was any inflation
in the pipeline are now talking about stagflation,” said Barry Ritholtz, CEO and director of equity research for Fusion IQ. “This is nothing like the 1970’s, which was a pretty dismal period, and not just because of polyester and disco.”


Even my detractors will have to admit that’s a funny line . . .



Watch inflation now!
Chris Isidore,
CNNMoney.com February 21 2008: 2:19 PM EST

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What's been said:

Discussions found on the web:
  1. JustinTheSkeptic commented on Feb 22

    Good one Barry…what about the importation of inflation from over-seas? Is that a non-issue?

  2. Barry Ritholtz commented on Feb 22

    That’s the next part of the column:

    Inflation hawks: Dust off the bell-bottom pants

    Still, there are reasons the economy could be heading for a period of stagflation.

    The weakening dollar is a concern since it raises the price of dollar-denominated commodities, such as oil and other raw materials, as well as imported goods.

    Ritholtz argues the weaker dollar is part of a longer-term trend that could keep price pressures building to very painful levels in the future.

    “The big risk is not that we have stagflation today,” he said. “The risk is down the road this turns into a serious case of stagflation. If I had to guess where we are, I’d say we’re probably where we were during the oil shock of 1973-74.”

    Ritholtz said that overseas demand from growing markets such as China and India are likely to keep prices for many goods high, even if consumption of those products falls in the United States.

    “Unless we see a significant U.S. recession that causes a slowdown overseas, inflation may be stickier this time around,” he said.

  3. Street Creds commented on Feb 22

    Hey, back off Disco.

    Donna Summer for President.

  4. Deborah commented on Feb 22

    These are usually the same people that use the term disinflation, which apparently means to “diss” inflation – the FOMC’s current monetary policy.

  5. GreenMachine commented on Feb 22

    So it seems inevitable that the FED will continue to cut, but will mortgage rates follow if this in turn raises inflation? Lately, mortgage rates have risen despite the continued cuts. TIP and DBA are solid and I like CGW for the long term, but what other investments should we be looking at? (I’ve never liked precious metals unless they are useful for something other than jewelry-like lithium.) The forthcoming fire sale on unsold condos in certain markets is begining to look intriguing over the next year as well.

  6. SPECTRE of Deflation commented on Feb 22

    We aren’t expanding monetary base or credit. We have had our inflation, but this time it showed up in asset pricing. In fact this is way worse than the 1970s. Our balance sheets and income statements were in much better shape individually and as a country, we were just coming off the Gold Standard, we still had our manufacturing base, we had just started the two income lifestyle. Today, who exactly do we send out to make the extra income needed to pay off the only thing that remains, DEBT. I guess Granny and the kids can pick up the slack.

  7. Eric Davis commented on Feb 22

    Sometimes I can’t figure out if I’m agreeing or disagreeing, with the great BR.

    I can’t figure out if we are in the late 60’s mid 60’s early 70’s late 70’s. All I ever think is that it Rhymes, and last time it ended with Volker and huge unemployment.

    it would be nice if we could skip to the end as fast as possible.

    Death of disco, and a double side of Punk.

    Rebirth of rock and roll, and a hella bull market… with little inflation.

    Kind of says that we are in the early “hermans hermits/the birds” stage of things… Cause I havn’t seen “The Doors”

    But.. I guess Britney spears and her crack addiction is kind of a passing of the “Dry White toast” in music..(but she was hot in that little school girl thing)

    Guess what I’m getting at is without some good music.. we aren’t even half way there.

    maybe we need chart porn with music and the DOW

  8. Douglas Watts commented on Feb 22

    Vickie Sue Robinson was hott …

    Polyester, not so much.

  9. cinefoz commented on Feb 22

    At this time, I think anyone who worries about stagflation is comparing normal times to credit powered overdrive spending, confusing the latter with normal times.

    Compared to the crack and meth powered Consumption of recent date, even the best of times would look like stagflation in comparison.

    Just because tie dyed shirts are making a comeback … I have three … this does not imply the stagflation of the 70s is back.

  10. michael schumacher commented on Feb 22


    has it occurred to you that the expanding monetary base that you can’t find any evidence of just bypasses the “regular” avenues of distribution and is sent directly at equities??

    Nahh…that would make sense.


  11. SPECTRE of Deflation commented on Feb 22

    I also see all the powers that be sitting around in a circle doing you know what. No one is stepping up to put a floor under anything at this point. How do you get inflation moving forward when we are in a contracting credit environment? Inflation is too much money chasing too few goods. As Cuba would say, “show me the money”.

  12. SPECTRE of Deflation commented on Feb 22

    MS, no I’m following everything pretty closely, but if you have any facts to add to your thought, post them. I want to see where it all comes from, and maybe you found a money tree. Otherwise we are SOL.

  13. KP commented on Feb 22

    No period in history has had so much aggregate demand…huge demand growing at such an incredible pace.

    Big demand, growing labor base, determination by the wealthy to squeeze the working poor for every dollar they can because suddenly the going price for yachts is skyrocketing.

    Can the few effectively manage the perceptions of the many?

  14. SPECTRE of Deflation commented on Feb 22

    MS brings up a good point concerning monetary base and credit. Can anyone name one thing that shows growth in money supply or credit? I mean if it’s out there, show us all where it is. I see credit/debt being destroyed on a daily basis, so I won’t bother posting that info because we are all aware of it, but if someone has information that the FED is being generous with money and credit, please point it out. Don’t leave us in suspense with your knowledge.

  15. SPECTRE of Deflation commented on Feb 22

    Concerning global growth, I agree that demand will continue to build, but taking the Chinese as an example, I keep hearing about the 1.2 billion people in China, but I don’t hear many saying that the 1.2 billion are poor peasants who are very far being consumers anywhere close to the developed world. They spend a third of the income on food staples to our 8%. Good luck on waiting for the Chinese. Did you see where the demand for Gold in India is down around 70% YOY?

  16. Groty commented on Feb 22

    Chicks dig men who wear lime green or powder blue leisure suits, with super wide lapels, in any macro environment.

  17. Eric Davis commented on Feb 22

    Damn… I’d love to have a lime green leisure suit… extra wide lapels and some Snap Bell bottoms and platforms…

    maybe some Neon Accents.

  18. michael schumacher commented on Feb 22

    think repo. process…….

    Exchanging near worthless paper (on the perception that it is still worth what it was early last year) for cash is not expanding the monetary base???? Capital has been destroyed……but it’s still early 2007 for the Feds and the repo. window.

    How is that not growing the monetary base??

    There is no smoking gun to be had in this argument so I think efforts to find such should be directed in places that show how declining assets can be exchanged for cash. The real argument in that process is who determines the “worth”…….


  19. Ross commented on Feb 22

    Ah yes, we have had a bout of demand pull, commodity style. Guess what comes next, cost push….wages and service prices.

    I am aware we have not the unionized labour base of the 70’s so it will no doubt begin with Government employees, police and fire, teachers and municiple workers. These folks are difficult to outsource. You can’t send your bath tub to Bejing to fix a clogged drain.

    I have a fellow who works for us part time doing odd jobs and what not. He also has a day job so he would be considered moonlighting. He works by the hour so in January we increased his pay by 10%. He was going to ask anyway. Last year he started charging us an extra $10 a trip to help offset his truck expense. Just one example of off the radar wage increases.

    It will be a long time til we monitize cheap African labour. The 1973-74 analogy is spot on. It will no doubt be somewhat different but it will feel the same.

  20. Johnny Vee commented on Feb 22

    Things you own are going down in value, things you consume are getting more expensive, and commodity prices are rising. It would seem like the 70’s except interest rates are not 15% and Volcker isn’t the man behind the curtain. What if commodity prices are just the next asset bubble to pop, or at least begin the descent? I have a feeling this won’t be over until the price of credit is cheap, but only for those that don’t need it—just like the good old days.

  21. SPECTRE of Deflation commented on Feb 22

    MS, Firstly the FED overcollaterallized 150% on any paper it holds. To think that the paper is worthless is silly, although exactly what anything is worth will have to be discovered. If you really want to see a CB play fast and loose, check out the EU.

    If I add up all the writedowns that have taken place, not to mention what is to come, net net it’s a wash or worse. In other words, they cannot generate enough new credit to replace the vaporized credit.

    Here’s an interesting thought. What happens to a 2% Treasury when money supply is contracting 2 to 3 percent per year? It’s some figuring, but I have confidence in your multiplication already.

  22. Shane commented on Feb 22


    I think what you may be looking for is in this article.


    Based upon that article, M3 is growing at ~15% yoy, and the monetary base is still growing at 1.5% yoy. Hardly massively deflationary.

    I completely agree that we are have a lot of credit destruction . . . however, my basic belief is that what allowed a lot of the credit to be created in the first place was an inflationary policy to prevent a big recession in 2001. So we have a couple of choices now, we either let the system purge itself by allowing the excess credit to get destroyed (b/c it was superfluous in the first place), or we try to maintain the extra credit and prevent a recession by creating more money-see M3. Unfortunately, it is my belief that the money created now by lower interest rates, fed infusions, etc, will not all go to support the credit bubble. It will collapse b/c it was unsustainable and risk was not probably taken into account. Sure the infusions will prob. help a little, but not enough to prevent it.

    My premise is the money being created now-M3 will funnel to where it can be used the most to make money. Stock market is dead (oh sure you can still make money at it but we aren’t going to be seeing 10-15% returns over the next 5 years. Housing is dead. Bonds are dead. The only place left to make money for big funds/investers right now are commodities, which are booming. Before it’s over we’ll have a commodity bubble just like Naz 01 and Housing 05. And we are not in a commodity bubble yet, I’d say we are at about 01-02 housing boom point.

  23. Shane commented on Feb 22

    wow, please ignore the massive typos, probably->properly . . . master’s degree work getting to me . . . ugh.

  24. SPECTRE of Deflation commented on Feb 22

    Ross, you better check out this site before we start talking about wage inflation. Where does the wage inflation come from when there is no money to pay prior obligations? pensiontsunami.com with headlines from today:

    February 22, 2008
    Vallejo, California’s Finances on the Brink
    Visalia, California Raises Retirees’ Share of Health Costs
    Orange, California School District Votes to Offer Generous Retirement Buyout
    Orange County, California Investments Lose Market Value as Fund Nears Default
    Turbulent Wall Street Erodes New Jersey Pension Funds by $4 Billion
    Evanston, Illinois Looks at New Taxes, Fees and Budget Cuts to Deal With $140 Million Pension Liability
    Joliet, Illinois Police and Firefighters Address Pension Funding Decline
    Kentucky’s Proposed Pension Reform Plan Reduces Benefits for Future Workers
    Kentucky’s Governor Sends Pension Plan to State Legislature (press release)
    View the Slide Show Outlining Proposed Changes to Kentucky’s Public Pension System (pdf)
    North Carolina Treasurer Defends Pensions; State Workers Group Given Records
    West Virginia Teacher Pension Bill OK’d by House, Sent to Senate
    Public Employee Benefits for Younger vs. Older Workers (column by Girard Miller)
    Bond Crisis Already Crimping Cities and States
    Boomers Have Changed the Nature of Work, Why Not the Nature of Retirement? (column)

  25. SPECTRE of Deflation commented on Feb 22

    Shane, let me explain why M2 and M3 are growing. From Bart at nowandthefuture.com:

    11/30/2007 – Note that much of the large growth in M3 lately has been in flows into CDs and Money Market Funds, a normal occurrence during financial turmoil. See our financial crisis page for more detail, and a picture of the current level of a U.S. financial crisis.

  26. Eric Davis commented on Feb 22

    I’d much rather discuss rock and roll and bell bottoms.

    and I’m not… taking a side one way or the other…

    spooky would be if the inflation/monetary credit expansion caused by the “Shadow banking system” and now it’s demise would actually cause uncontrollable “Deflation” that monetary policy will never be able to “Re-flate”.. and literally Crush the global economy..

    just an interesting thing to ponder…

  27. SPECTRE of Deflation commented on Feb 22

    Guys, it’s been a real ball this morning, but I must run. Good trading to all.

  28. michael schumacher commented on Feb 22


    The thing that is missing from your analysis is that it is based on theoretics.

    “Firstly the FED overcollaterallized 150% on any paper it holds. ”

    I seriously doubt that is happening now. But along the same rationale they also say that the fed is not supposed to back stop the market. We’ve seen plenty of examples of this, usually every day. You will not find any mandate that discusses that….but it happens. Also the FHLA disbursements to the lenders….that is creating value or capital where it did not exist…so if by replacing destroyed capital with money that is not backed by anything other than “trust me” is not expanding the monetary base I see why you can’t find any “evidence” about it….that’s not something that the current people in power want to go and shout about…

    Our Fed is actively engaged in providing capital that is not valued at the same level that the collateral being used to issue it is worth. If it were these banks wouldn’t need to do this.

    I can talk about what I would like to see all day…..but the reality is usually very different from what the perception of it should be.


  29. SPECTRE of Deflation commented on Feb 22

    Eric, you nailed my and others thesis on where we are. Maybe they pull the rabbit out of the hat though because hope springs eternal. I would prefer inflation to deflation, but I think it’s come and gone like a theif in the night.

  30. Ross commented on Feb 22

    They get the money from taxes. If your taxes increase just to provide the same services, is that inflation?

    I understand what you are saying about deflation. Gary Shilling (whom I respect) has been making this arguement since 1978.

    In a fiat system, you are only allowed to have inflation. Price stability is Valhalla.

  31. Eric Davis commented on Feb 22

    I don’t take a side… and am morbidly excited to see how it works out.

    but I see a tremendous amount of deflation in the fact a billionaire can’t get money from his ARS… to invest in anything.

    And Inflation from the irresponsible actions of the Greenspan fool in the shower.(but apparently he liked bathtubs, which seems strangely revealing(in more than just the creepy way))… But I can also defend that fed, since they were probably using the fed rate to try and create jobs, which never materialized.. which explains the extended low rate.


    I see the actions of Uncle Ben Being more… Volker Esque, than most people think… IE they are generals fighting the former war…

    and if we retest and fail at the lows with no fed action…. that will further bully this thesis on the fed… and the remaining Fed Bullets will only be used to “Unlock” frozen Credit markets.

    But Like MS says… it’s all Theory…

    and all the metrics, Like BR, I find almost offensive in their ability to mask the truth, more than shed light…

    But I also believe in human resilience…

    so Armageddon averted…. at least for now…

  32. Reynold Weidenaar commented on Feb 22

    Hey, don’t dis disco! It’s way relevant. In the immortal words of Lipps, Inc.:

    “After that I seen my brother
    And he started talkin’ all that jive
    And all I wanted was to borrow five

    Check out the album “Funkytown” for this prescient blast from the past, “I Need Some Cash”:

    Or you can get it on iTunes.

  33. Reynold Weidenaar commented on Feb 22

    Hey, don’t dis disco! It’s way relevant. In the immortal words of Lipps, Inc.:

    “After that I seen my brother
    And he started talkin’ all that jive
    And all I wanted was to borrow five

    Check out the album “Funkytown” for this prescient blast from the past, “I Need Some Cash”:

    Or you can get it on iTunes.

  34. AGG commented on Feb 22

    All those white knuckles you see are the rich clutching their money. You see, they bought into the psycho-babble back in the 90s about reptilian brains (did they mean republican brains?) and have now become dinasaurs.
    Wealth protection in hard times is only cost effective for those who have the good will of the community. For those who don’t, no amount of investment in precious metals such as gold, silver and LEAD will prevent much loss.
    Start showing a little respect and compassion for your fellow man and stop worrying so much about who is getting the upper hand. It may save your hide.

  35. howard commented on Feb 22

    really, dissing disco, barry, is so beneath you (dissing polyester, on the other hand, is fine).

    like every other popular music form, there was a lot of dreck marketed under the name “disco,” but there were lots of great disco tunes as well….

  36. donna commented on Feb 22

    Disco gets a lot of bad press, but it completely revived the American musical scene at the time, and led to hip hop, rap, and other popular forms of music, as well as bringing back real classical lines and a lot of jazz style to popular music.

    And it was a real kick to dance to as well. But I guess you had to be a child of the 70s to truly appreciate it. ;^)

    Never got into polyester – give me my natural fabrics and t-shirts and jeans!

    And Donna Summer? Awesome.

    But this doesn’t feel like the 70s to me. We had savings and were a creditor nation then. This feels – darker.

  37. Pat G. commented on Feb 22

    “From Bart at nowandthefuture.com:” Did you miss the article titled “The consumer price index is a lie”? Let’s look at the inflation/deflation arguement from a real perspective.

    BR posted an article about the 1% who I would argue probably are our government’s puppet masters because that’s in their best interests (job 1).

    The 1% do not want deflation. Why? Because lower asset prices beget new 1% members and they like their exclusivity. Inflation? Not an issue. Their money is in foreign reserves in foreign locations.

    After the slaughter, they’ll be able to build more wealth because they’ll still have their resources intact and in the process put more distance between us.

    (SPECTRE of Deflation) hope you read this later.

  38. Estragon commented on Feb 22

    BR – “If I had to guess where we are, I’d say we’re probably where we were during the oil shock of 1973-74”

    I don’t think we’re there yet. Inflation was a front page issue by 73/74 (wage controls etc.), and the oil issue wasn’t just price, but supply at any cost. There was also a growing realization that the ironclad trade-off between employment and inflation wasn’t as ironclad as commonly thought.

    The parallel is more likely 1970, but we may move through the process more quickly today. The 70’s are well within living memory, and the experience will likely cause those of us of a certain age to act in anticipatory ways that speed up the cycle.

    In my view, the deflationary stage isn’t likely to start until the US has largely lost the ability to borrow with foreign buyers taking exchange rate risk. Until then, the US can and will create whatever money is needed to accomodate the maturation of past asset price inflation and credit expansion.

  39. flow5 commented on Feb 22

    I, knowing who predicted stagflation or who denigrated the “Phillips Curve” before anyone coined the term, would also look to that economist that foretold that event for the answer.

    Dr. Leland James Pritchard (Feb 20 1908 – Nov 15 1991) taught political economy courses at Syracuse University Maxwell School of Public Administration while getting his masters in statistics, and received a Ph.D. from the University of Chicago in 1933, where he was elected Phi Beta Kappa. Dr. Pritchard served with the Federal Emergency Relief Administration, The Works Projects Administration, and The War Labor Board. He served both as the Chairman of the Economics Department from 1955 to 1962 and Dean of the School of Business from 1955 to 1962. He was a Fulbright lecturer and President 1963-1964 of the Midwest Economics Association. His extensive research and publication record display a broad knowledge of both Finance and Economic Statistics. His Money and Banking Texts (1958, 1964) were widely used and are perhaps the most literate of all American texts in economics.

  40. SPECTRE of Deflation commented on Feb 22

    Pat G, I read lots of things, and I don’t argue that the CPI is a lie, and that inflation has been higher than reported. It doesn’t change the facts on the ground as they are now. I believe the historical mean is two to three times gross income on a house. Run some numbers on the formally red hot housing cities, and you can see that we have a very long way to go concerning a deflating asset formally called a house.

    You forget that the rich took it in the shorts during the Depression as well, although as a percentage of worth,, it was easily cushioned. They had to give up the Gold in exchange for paper, and then watch Gold go up 30%ish by government decree.

    Unfortunately, we can’t pull the same trick twice.

  41. Pat G. commented on Feb 22

    SPECTRE of Deflation

    I also assume then that you also read that interesting article posted on the same site which correlates the Weimer Germany crash with what’s going on in the U.S. today? I want to thank you for turning me onto that site as I will return to it as I do several each day.

  42. SPECTRE of Deflation commented on Feb 23

    Pat G, I have read hundreds of articles from both camps. The FED knows what we know. Hyperinflate and die just like Germany as you mentioned. I don’t see them going the German route to date, but things can change. From where I sit right now, I’m firmly in the deflation camp. When something changes, so will my thinking.

    I’m glad you liked the site, and hope it adds to your knowledge.

  43. Blissex commented on Feb 23

    As to inflation, recession and the 70s, here is an excellent quote:

    «The Federal Reserve had to show that when faced with the painful choice between maintaining a tight monetary policy to fight inflation and easing monetary policy to combat recession, it would choose to fight inflation. In other words to establish its credibility, the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people’s blood.» [Mussa, “American Economic Policy in the 1980s”, University of Chicago Press 1994].

    This is a quote lifted from Andrew Glyn’s excellent “Capitalism Unleashed” (Oxford University Press 2007).

  44. Darkness commented on Feb 24

    Chinese as an example, I keep hearing about the 1.2 billion people in China, but I don’t hear many saying that the 1.2 billion are poor peasants who are very far being consumers anywhere close to the developed world.

    I can’t speak to China because I’ve only been to Hong Kong, but I just spent a month in India. Their middle class is the size of our entire population: 330,000,000 people. Things are gangbusters. Every single person you meet in an entrepreneur, down to the aggressive eight-year-olds boy selling pencils and little carvings. You’ve never seen such business people, except one in a hundred here in the U.S. It is capitalism cubed. If the roads there ever get fixed we are doomed. Poor infrastructure is the biggest hurdle there.

    In this corner: Jesus, riding a donkey, instructing man to be humble and poor to inherit the earth. In the other corner, accompanied by her elephants: Lakshmi, telling her blessed to strive for wealth, material goods, and beauty. The more the better–can’t be too rich or too beautiful.

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