The latest consumer price inflation (CPI) numbers were released, and the consumer price inflation rates are relatively low. I say “relatively” so as to distinguish our world of central banking as compared to a time without the Federal Reserve.
In the late 19thcentury, prior to the existence of the Federal Reserve, the overall price level did not go up. In fact, prices actually slightly declined, as productivity increased.
The U.S. was on something of a gold standard, even if it wasn’t pure. Libertarians should actually favor a completely free market in money, but obviously a gold standard is far preferable to the disaster we have now where the central bank controls the money supply and continually tampers with interest rates.
So considering the last century, with the existence of the Fed, price inflation is relatively low, at least according to the government statistics. The year-over-year CPI in May stood at 1.8%. The median CPI is a little higher at 2.7%. This certainly isn’t the 1970s when consumer price inflation was in the double digits.
If anything, this more resembles the 1920s. Murray Rothbard wrote a book called America’s Great Depression, which really details the lead up to the Great Depression. It was the easy money policies of the 1920s that eventually led to the bust. You can read his comments here on how stable prices fooled a lot of people into thinking everything was fine.
I am not saying we are going to have another Great Depression. There were a lot of disastrous things done after 1929 that prolonged the depression. Some people say the depression ended with the beginning of World War 2, but that really only “solved” the unemployment problem by sending a mass number of boys overseas to fight. The economy didn’t really recover until after the war ended.
Hoover and Roosevelt both made the situation far worse with their economic policies, which generally consisted of more government interventionism.
If we hit a severe recession, we don’t know what the policies will be. We can assume more monetary inflation by the Federal Reserve, and likely more spending out of Washington DC, but we don’t know for sure. We can hope that there will not be more interference in the labor markets. We don’t want unemployment like there was in the Great Depression.
Asset Prices vs. Consumer Prices
Even though I am not predicting another Great Depression, I am making a comparison of 2019 to, perhaps, 1928. Maybe it’s more like 1927 or 1929. 90 years is a nice even number, but I don’t know that the major crash will happen before the end of this year.
In the late 1920s, people saw stable prices, at least for many consumer products. However, there was asset price inflation. The obvious sector that was most inflated was stocks. I believe that stocks are the most inflated now. I am not considering asset classes that most people are not in, such as cryptocurrencies.
When the Fed creates money out of thin air and keeps interest rates artificially low, there are many potential consequences. Rising consumer prices is just one possible consequence. For sure, we know that it results in a misallocation of resources. There is malinvestment, where capital is put into projects that otherwise wouldn’t have happened without the loose monetary policy.
The money supply is not the only thing that drives prices. There is the supply and demand of each individual product. There is productivity, which can increase the number of goods and services. There is also the demand for money. If people are saving more and paying down debt, this can counteract the monetary inflation. And the lending market through fractional reserve banking impacts the money supply.
We aren’t going to see a complete replay of the Great Depression, but there may be similarities. I think the relatively stable prices are going to fool a lot of people.
Stocks will get hit the hardest, but other sectors such as housing will also take a hit. Unemployment will rise, as is typical in any recession. The resources need to be reallocated in accordance with consumer demand.
The government statistics aren’t completely reliable, but prices are not going up dramatically at the grocery store. Health insurance prices have certainly gone up, but that is more of a function of the government’s regulations than it is of overall consumer price inflation.
We have asset bubbles. That is where you will see the big pop. The yield curve, as measured by the 10-year yield vs. the 3-month yield, is inverted. A recession in 2020 is looking likely. We may be in 1928 right now.
Are you going to buy stocks to get the last little bit out of the bull market? It is better to be out too early than to be out too late.