Core view
At the time of the conflict between Russia and Ukraine, crude oil was approaching us $140 / barrel, European natural gas rose 27% in a single day, exceeding 200 euros / MWh, and the prices of various Shenzhen Agricultural Products Group Co.Ltd(000061) commodities continued to rise, reminding the capital market of the gloomy memory of the great stagflation of the 1970s. Here, we look back on the past experience 50 years ago. There are many similarities and differences between history and today:
1) both have held a "temporary" view on inflation. After experiencing low inflation and high growth in the golden 1960s, the society generally believed that high inflation had passed in the 1970s. Inflation came more from non economic factors such as trade unions and international politics. Monetary policy could not resist cost inflation. Therefore, it was not acceptable to suppress inflation at the cost of 6% unemployment rate. At present, the society believes that inflation comes from temporary factors such as the outbreak of the epidemic, the rupture of the supply chain and the conflict between Russia and Ukraine; However, recently, the Fed's view on monetary policy has partially shifted to prudence. Unlike in the past, it has more experience in dealing with inflation than before.
2) the independence of the Federal Reserve needs to be re examined. In the 1970s, burns was subject to Nixon. Since then, President Carter appointed William Miller as Treasury Secretary and chairman of the Federal Reserve (the only one in American History). During the outbreak, trump first made monetary policy remarks that interfered with the independence of the Federal Reserve led by Powell. Later, Biden came to power and appointed Yellen, who was also a Democratic Party, as finance minister - Yellen was once known as the "Dove" Fed chairman. All four people support monetary easing (MMT theory), and the independence of the Federal Reserve needs to be re examined.
3) the two parties launched a welfare contest to win over voters. In the 1970s, the Democratic Party and the Republican Party of the United States entered a state of opposition for the first time, and started the "donkey elephant struggle". In order to win over voters, they competed to choose fiscal stimulus. Democrats prefer government spending to increase benefits, while Republicans prefer tax cuts for business residents. In this round, the two parties have once again entered the situation of extreme opposition. Therefore, in recent years, they have taken turns to promote "big water release" and "big stimulus".
4) after the "Big Bang" of aggregate demand in the 1960s, the White House and the Federal Reserve still wanted the economy to reach a new peak, and excessive strong stimulus pushed up "stagflation". In the 1960s, the United States put forward the "great social plan", which superimposed the baby boom and the large space for fiscal redundancy in the United States, resulting in a "big explosion" of demand in the United States. After the stimulus, the US economy faced downward pressure in the 1970s, but the White House and the Federal Reserve generally disagreed with the "downward" of the US economy and tried to adopt large-scale stimulus policies to promote the economy back to its peak; Second, all sectors of society attributed the causes of inflation to "temporary, non economic" trade unions, politics and other factors, and did not agree to control inflation at the cost of unemployment and recession, which eventually led to "stagflation". During the epidemic period, the US Treasury Department issued cash subsidies to residents for many times, but compared with the 1970s, there was no baby boom, there was less room for financial redundancy, and the volume of demand was different from that of that year.
5) unexpected aggregate supply shock. The food crisis in 70-72, the first oil crisis in 73-74 and the second oil crisis in 78-79. During the epidemic period + Russia Ukraine conflict, the global total supply is under pressure, especially the sharp rise in oil prices, natural gas and food prices, which may make the rise of bulk prices last longer. The follow-up progress of the impact of Russia Ukraine conflict on bulk prices can be further observed.
6) the pressure of economic inflation is high. In the 1970s, the CPI of the United States exceeded 10%, and the oil consumption in 1978 was even close to that in 2017. The United States changed from a net exporter to a net importer; At present, the CPI has reached 7.5%, a new high in nearly 40 years, and the unemployment rate was only 3.8% in February of 20 years, approaching a historical low. Considering the conflict between Russia and Ukraine, the inflationary pressure may last longer than expected.
7) the government still wants to increase its efforts to stimulate the economy. In the 1960s and 1970s, the United States successively launched Johnson's "great society", Ford tax cut and Carter tax cut. In the same period, the Federal Reserve released water and continued to stimulate. During the epidemic period, trump cut taxes in 18 years, the Federal Reserve "dropped money by helicopter" in 19-21 years, and huge financial subsidies in 20 years. However, at present, the attitude of the Federal Reserve has gradually turned to hawks, and Biden's infrastructure stimulus plan has heavy resistance.
8) the trend of the US dollar is different. The collapse of the Bretton Woods system in 1973, the rapid depreciation of the US dollar and the appreciation of the yen and the mark produced imported inflationary pressure; In the post epidemic era, the US dollar index continued to strengthen, but follow-up attention was paid to the potential imported inflationary pressure brought to the United States by RMB appreciation and China US tariffs.
Text from the perspective of the White House and the Federal Reserve, we conduct a comprehensive review and analysis of American politics, economy and policy-making from 1960 to 1980, and reveal the causes and details of great stagflation. The details are as follows.
Risk tip: the spread of the epidemic exceeded expectations, the tightening of the Federal Reserve exceeded expectations, and the conflict between Russia and Ukraine exceeded expectations.
