The 1974 Deflation
I was born in 1970, but even though I was a small child during most of the 70′s, my elders regaled me with many tales of the inflationary decade. They never told me about a short deflation that happened in 1974, but maybe they just don’t know a deflation when they see one. I’ve found some interesting evidence for deflation in 1974 lately, so I wrote this article to investigate further.
Deflation? In the 70′s?
Mike Shedlock (a.k.a. Mish) is a well-known financial blogger who believes we are having another deflation right now. In December, Mish wrote a post called Humpty Dumpty On Inflation where he accuses those of us focused on inflation of performing what he calls the “inflationista two-step” because we don’t admit that falling housing and stock market prices constitute a deflation.
Near the end of the article, Mish offers a spreadsheet chart of 15 conditions and shows how he thinks they would look under deflation or inflation, and, of course, he ventures to say that the 15 deflation conditions all match what is happening right now. Here’s a small version of his chart, and you can click it to open a larger image from Mish’s site directly:
On a lark, I decided to take a look at each of these conditions and see whether they were present during the 1974-1976 credit crunch. Here’s what I found in a brief google session.
What Happened in 1974?
- Falling Treasury Yields?
No: 10 year yields stayed 7-8% in 74-76.
Maybe: 5 year yields went from 8.1 to 6.1% during that period.
Yes: 6 month yield went from 8.1% to 4.5% peak to trough 74-76.Depends on what maturity, but we’ll just call this a “maybe” and count it as a “no”.
- Falling home prices?
Yes.
Home prices fell from about 1972 to 1976. Then they took off.
The UK was also in the middle of an epic housing bust, just like we are now. - Rising Corporate Bond Yields?
- Rising Dollar?
- Falling Commodity Prices?
No.
Pretty stable between the oil price spikes of 1973 and 1979.
This means is that commodity prices are correlated with oil prices.
(but we peak oilers knew that already) - Falling Consumer prices?
But wait a second. Despite Mish’s claim, we don’t actually have falling consumer prices NOW, so I don’t know where Mish gets off putting this in there. We may be getting close to flat in the short term, but John Williams shows how the same methodology that was used in the 1970′s would currently show 4% inflation, even MORE than we had in 1975.
Mish has to use the Case-Schiller version of CPI to get his negative number. I find it hard to justify taking out the Homeowner’s equivalent rent components without taking into account all of the other manipulated components that John Williams has also identified over the last several years.
So, we can say this: we did have a big slowdown in CPI in 1974, kinda like now. Did that mean the inflationary decade was over? Nope. It just took a break for a deep recession.
- Rising Unemployment?
- Negative GDP?
Yes.
Went from 5+% growth in 72-73 to negative for both 74 and 75 (MS excel spreadhseet link). - Falling Stock Market?
Yes!!
1973-1974 saw the Dow down over 40% in the US.
Down 73% in the UK.I hope people take a second to think about that. A 40+% decline in less than two years? That’s what we just had in 2008! And this happened the same way in 1974? A year after brand new record high oil prices in 1973? Really? Wow.
This is starting to look like a good facsimile to today. If you go look at what gold did after bottoming in 1976 — it makes me want to go out and buy some right now!
- Falling Credit Marked to Market?
Yes.
It was called a “credit crisis” because there were actual credit issues.
Franklin national bank failed in 1974. It was the 20th largest bank.
“Net chargeoffs as a percentage of average total loans increased in 1974 and even more in 1975.” - Slowly Rising Base Money Supply?
No.
It went from 10% yoy growth down to yoy 6% growth 74-76.
I don’t call this “slow” growth.
Never went under 6% growth rate until the recession was over. - Spiking Base Money Supply %wise (as happened in great depression)?
Yes.
If you look at the graph in Mish’s article, the spike he talks about is also present right at the beginning of the 1974-1975 recession.It isn’t of the same magnitude, so somehow it doesn’t count for Mish, but this is because he wants to say Stagflation and Deflation have different indicators. What he actually shows is that every recession isn’t exactly the same, and that depressions might be higher magnitude than recessions. Well, DUH!
- Banks Hoard Cash?
Yes.
Bank Credit as a % of GDP began to fall from a peak at the end of 1974. See Figures 7 and 14 here. - Rising Savings Rate?
Yes.
How could it have risen from an already high rate of 10% before the 1974 during a recession?
But it actually did rise to 14% for a quarter, which is still the highest rate on record since 1960.And how can savings NOT rise from zero percent the last few years??? This point is pretty disingenuous by Mish. C’mon, the fact it has risen to a measly TWO percent again is NOT an indicator of deflation!
People are hoarding cash at a 2% annual rate?
And this is an indicator of a rampant deflation? Puh-lease! - Purchasing Power of Gold rises (compared to other commodities)?
Yes.
“such as in 1974 when the CRB topped out in February and gold not until the end of December”
Yes.
Oddly enough, the dollar did rise sharply for a period of time around 75-76.
Running the Numbers
So, there we have it. That’s what happened in 1974. Let’s see how those conditions stack up against what is happening today and the great depression and see if Mish has helped us identify a long-overlooked deflation in 1974:
So, if we toss out Mish’s bogus claim that consumer prices are falling today, then he only really showed that 14 out of 15 of these conditions are present now. In 1974, we actually had 13 of the 15 present.
Does this mean Mish helped us find a long lost deflationary episode? Or that Mish has found some indicators of economic turmoil and confused them for indicators of deflation? I’d have to say I think it is the latter. This doesn’t mean we don’t have deflation today, or that we won’t, but it does mean that Mish has only proven that we’re in a period of economic turmoil.
Limits to Growth (again)
One of the main differences between the 1930′s and the 70′s and now is the state of our monetary system. There was nothing preventing us from printing all the money we needed in the 70′s just as there is nothing to restrain the Fed today. The 30′s were entirely different because of the role of gold in global monetary affairs.
The other difference was that the 1930′s were a time of massive abundance everywhere, while the 70′s and this decade are times of limits. Franklin Delano Roosevelt adeptly decscribed the deflationary conditions in his first inagural address of 1933:
Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.
Generous use languishes in sight of plentiful supply precisely because we had all the goods in the world but no money to chase them. In modern times with the limits to growth approaching a second time, we have the opposite conditions: money everywhere but not enough goods to keep this world running the way we’ve been running it.
In the 30′s, all the oil wealth was still ahead of us and resources were cheap and available. In the 1970′s, we brushed against the limits to North American growth, and our only escape was through the project of globalization, which brought the resources of the rest of the world to the markets of the West. The “disinflation” of the 80′s and 90′s came as the result of the relative success of that globalization project. But now, once again, we’re brushing against the limits to growth, with oil supplies about to decline and a population of over 7 billion people that is still growing. Except this time the limits are global, and there are no more reprieves to be found in lost corners of our planet.
When we look at things from this perspective, it is obvious that the theme of the 5 years on either side of 2009, just as were the years on either side of 1974, will be inflation, and not deflation. Stock markets will go down 40% sometimes during tumultuous economic periods, but if we keep our eye on the big picture, the themes will be clear as day.
-Robert
