“The real shock was that the dollar was depreciating against oil, gold, against foreign currencies and against nearly everything else.” – Robert L. Bartley, The Seven Fat Years, p. 32
The late Robert Bartley wrote the passage that begins this piece in his classic 1992 book, The Seven Fat Years. Bartley was writing about the early 1970s.
To this day, economists, pundits and politicians confuse the so-called “oil shocks” in the 1970s with the Arab oil embargo from 1973. Supposedly the latter resulted in “shortages,” and inflation. No, to blame inflation on rising prices is like fingering wet sidewalks as the cause of rain. At best causation is being reversed.
The main thing is that Bartley, along with a few others uniquely understood that there were no “oil shocks” to speak of in the 1970s. As economic logic dictates, embargoes are toothless given the simple truth that there’s no accounting for the final destination of any good. The oil that Arab countries ceased selling into U.S. markets still reached U.S. markets; the only difference being that Americans bought “Arab oil” from those the Arabs sold it to.
As the value of the dollar declined in the ‘70s the prices of all commodities were rising. Call it inflation. The real kind. Crucial here is that artificial government measures of inflation from the 1970s like CPI still factored in commodities like food and fuel.
This looms large considering what happened in the early 2000s. By then, CPI and other governmental measures of inflation were largely stripped of food and fuel. This is important mainly because what Bartley described as happening in the early 1970s was exactly what happened yet again in the early 2000s. The dollar began a long descent against nearly every foreign currency, along with commodities like gold, oil, wheat, soybeans. Pick your commodity.
Figure that a barrel of oil fetched $10 in 1998, but by the second half of the 21st century’s first decade this same barrel cost over $100. A barrel never dipped below $100 until after 2014. Inflation? Yes. The real kind. Actual currency devaluation. Government measures weren’t as sensitive to it, and the clue to why resided in “government measure.” Market goods like food and fuel no longer informed the measure. Voila! No inflation despite market signals revealing just that.
What’s endlessly fascinating about the inflation from the 2000s is how many conservatives and Republicans (or both) in good standing wholly sat out the dollar’s descent. Even though it very much resembled what had taken place in the 1970s, this truth rarely came up in op-eds or on talk shows. One could reasonably assume that Republicans have their partisan qualities too. A Republican named George W. Bush was in the White House, the Bush Treasury naively favored the currency devaluation that proved so economically harmful in the 1970s (and that was reversed under a Republican by the name of Reagan in the 1980s, and Democrat named Clinton in the 1990s), and so economic types from the GOP camp largely remained quiet as the greenback fell against everything.
All of this rates prominent mention now given the rediscovery of “inflation” by all-too-many self-proclaimed “hawks” on the Right. Oil at $80/ barrel supposedly signals raging price pressures. Ok, but where were all the inflation-obsessed during the first two decades of the 21st century when a barrel routinely fetched well over $100?
Which brings us to the present. Prices of many goods are up. And the long dormant inflation “hawks” are up in arms. Socialism! Money supply! No, lockdowns to varying degrees eviscerated trillions of commercial arrangements reached over many decades around the world. Put another way, the taking by politicians of the freedom to work and produce around the world compromised the very labor division that has long enabled huge supply advances in concert with falling prices for everything. This has resulted in near-term shortages. Yes, central planning always results in shortages and price spikes.
The only problem for the neo-hawks is that rising prices born of near or long-term supply challenges are not inflation. A rise in the price of one good logically implies a fall in the price of other. If Honeycrisp apples soar in price due to a sudden discovery that they cure cancer, logic dictates fewer dollars to buy other market goods. These things balance.
Extra funny about the here and now is that the “hawks” are pointing to a recent CPI increase last reached in 1990. Yes, Iraq’s 1990 invasion of Kuwait had spooked markets fearful that looming war would result in substantially less oil flowing out of the Middle East. The good news is that the resulting fighting proved brief. Yes, the oil spikes that drove up 1990 CPI proved “transitory.” So are today’s spikes transitory.
A Fed that is nearly always wrong is right at the moment. Except that what we’re experiencing is not even short-term “inflation.” It’s just shortages born of needless lockdowns.
Inflation is always and everywhere a devaluation of the currency, which is not what we’re seeing now in any notable way. About actual inflation, it would be easier to take the “hawks” seriously if they’d said or written anything in the 2000s about the dollar’s collapse. Except that they didn’t. Either they’re blindly partisan or they don’t really know what inflation is. Or maybe both.