The situation was different in the 1970s. During the 1970s private firms centered their capital budget planning and operational budgets on the assumption that the rate of inflation would be a steady 12% per annum. In effect, management was countenancing supplier price increases of 12% annually. Wage increases also settled at 12% per annum. Interest rates, nominal interest rates, on savings account balances were 10% to 14%; mortgage rates peaked at 22% per annum on 5-year term mortgages (25-year amortization). It was a different environment entirely from the environment of the 2019-2024 period. The economic environment of the 2025-2028 period remains unknown, but it is not commencing auspiciously. The chaotic start to the Trump administration this past month presages a chaotic policy environment and upended international trade patterns and a more fraughtful realignment of international security arrangements with the U.S. seemingly intent on going it alone. These factors were not present in the 1970s, or if present were not so intent on upending the status quo ex ante as this new administration's reordering of western global trade and security alliances will be if the displayed pronouncements of the president and his administrative aides since January 20th are any indication to go by.
"The chaotic start to the Trump administration this past month presages a chaotic policy environment and upended international trade patterns and a more fraughtful realignment of international security arrangements with the U.S. seemingly intent on going it alone."
So getting rid of corruption and fraud is chaotic. OK - I'm good with chaos, I guess.
If there is corruption and fraud in the government of the U.S., then it will not likely be found, or if found it is unlikely to lead to successful prosecutions through the federal courts. What this appears to be is a case of regime change on a scale that is unprecedented. The typical transition from one president to another would entail the dismissal of the political appointees of the outgoing administration without entailing the wholesale dimissal of the civil service personnel. Now, that is an internal matter (in terms of the U.S. as a nation-state), that does not affect the broader international economy to any significant degree. Presumably there will be some form of welfare improvement arising from lower costs in delivering government services to the nation. If there were no welfare gains arising from the "chaos" or if the welfare gains achieved by "chaoic administrative measures" were less than the welfare gains achievable via better planning and more systematic implementation then "chaos" is a poor choice as a modus operandi.
In the case of international trade relations and international security arrangements, "chaos" is likely to welfare reducing for the U.S. and its foreign national counterparts. Autarky is an unlikely candidate to improve welfare generally in the U.S., but it may enrich a few special interest groups and in that sense it is politically rewarding to those who can take advantage of it. On international security, "chaotic" is not a term that would gain much buy-in by foreign governments that the U.S. may have to rely upon at some point in future. Since the U.S. Joint Chiefs of Staff have conceded that the U.S. is at this stage unable to fight a two-front war, if it should materialise, the U.S. cannot afford to alienate its allies despite what the president might believe.
"Autarky is an unlikely candidate to improve welfare generally in the U.S., but it may enrich a few special interest groups and in that sense it is politically rewarding to those who can take advantage of it."
1) Trump and Musk are not uncovering the Biden Fraud, rather it is uncovering the Uniparty fraud of decades. It is chaotic looking to those who have been utterly asleep at the wheel. It is the similar in many ways to what Milei is doing in Argentina and it is exquisitely beautiful.
2) Autarky - Well, if you believe in airy-fairy free trade macroeconomics in an academic sort of way, I get it. That is not what is about to happen. There are trading "partners" who want us destroyed and the main one is Communist China. The faster we can get building stuff here, the faster we stop enriching Xi's monster country and the faster we are not reliant on China. If that causes a rise in marginal prices, I'm good with that. That is the price of freedom and liberty in this case. China is at war with us. You may not like this war, but the war likes you.
Shifting lines...Hut! hut! Omaha! Right..I guess if Covid comes back in a more virulent form or Bird Flu steps up and we have Pandemic-II and the health dept people shutter the economy and the Fed dallies again and the fiscal spigot...well, you get the picture. The lines on the chart create a correlation, but there is a lot of stuff behind the scenes - stuff that matters. As you mention a severe recession, spiking oil prices, an Arab oil embargo of the US—Nixon closed the gold window in 1971—a bit earlier...yeah a lot of stuff there apart from fed funds Vs inflation. There was a protracted fall in productivity too , probably related to high oil prices and environmental mandates that mandated investment but did not account in GDP for any air or water clean up that resulted.
I have been concerned that this inflation problem BEGAN mid-1960s to 1980s. The story was one of too little too late. It was true with or without recession and regardless of recession severity. Even when the Fed did hike rates in a more timely fashion (1974-75) rates did not linger higher enough; rates were cut too soon and too sharply. This was all kicked off by a mid-196Os 'soft landing' when the Fed hiked rates then stopped! No recession; inflation that had flared fell back but, claissically, did not fall back to its pre-tigheing speed. Nether did inflation get back there after the 1969-70 recession or the 1973-75 recession... Do we see a pattern? It is not just FF>inflation. It is F>Infl for long enough to produce a decline in inflation. This is why the current policy scares me with or without Trump. The Fed did not stick with it and is now operating off forecasts and cutting rates reducing teh premium of FF over inflation. Who could possibly think this is a good idea? Maybe some PhD who would point out to this dumb commenter that M-poilcy works with a lag and so must be preemeptive and must rely on forecasts.. OK I do get it. But even when the forecasts are terrible? Its like this: you are lost in a strange city so naturally you hire a guide. You employ another visitor who is also lost to help you. GREAT! I DON'T THINK SO. That is the caveat. Reacting quickly to more reliable actual data makes more sense to me. Economists like many professionals are trapped in a paradigm of their own making. They have been doing it too long they do not even think about the logic of it any more. Then there is the little matter that eonomiic models do not and have not forecasted inflation well. and John's view of the FTPL. So we are really far more lsot than anyone admits. and we are supposed to have anchored inflation expectations?? How could anyone belevie in that??
I think it is funny how the Keynesians are in mourning over the potential huge cut in government spending. The multiplier effect of government spending on GDP is 0 or maybe even negative. Hence, they are calling for a recession and with it lower interest rates.
Instead, I think that we might see lower interest rates due to decreases in energy prices, decreases in labor costs due to more people on the market looking for work as government slims down, and lower home prices as homes come on the market.
Conversely, if deregulation happens, combined with lower taxes, we could see a lot of private growth.
What are you using as "inflation"? CPI? Or PCE? Both measures are imperfect. If you look at price of gold in dollars (a market measure rather than a govt.-generated one) the 70s also look painful but the story 2005 to 2025 is something else. https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart
The Fed switched to core PCE in 2000….and from 2005-2008 CPI was elevated but core PCE was only slightly elevated. People seem to have forgotten that CPI hit 5.5% in July of 2008. Gee, what else happened around that time? 😉
What if the ideas of Fischer Black and Eugene Fama called the "New Monetary Economics," which was recently discussed and summarized by Tyler Cowan and Alex Tabarrok in their Marginal Revolution podcast is spot on? What if the Fed has no real ability to control "the money supply," a term that isn't really well defined?
I would find it extremely interesting to read or listen to John Cochrane's thoughts about the NME and how those ideas accord with FTPL. I must say that I find NME quite compelling.
The idea that the Fed has no control over the money supply is nonsense. Look at 2020, when the Fed instituted monetary expansion policies, driving M2 to an all-time high in December. At the same time, COVID slowed economic activity and reduced the need for money—a perfect storm for triggering 2021 inflation. Read my paper: http://www.discenza.com/discenza-Inflation.pdf
Yes, of course. The Fed can absolutely force a reduction in bank reserves. But as Tyler and Alex seem to agree, the Fed has marginal effects, and the shadow banking system can offset whatever the Fed does at the margin, perhaps.
I suggest you read up on the Fed's Open Market operations and how they can add/remove money from the system. Under today's Fed policy, Reserve requirements are not in play.
The 2021 inflation didn't need a perfect storm, although I agree with your analysis. The perfect storm is Congress and its complete lack of any effective budget constraint. Price inflation is at least 8 or 9 percent, never mind CPI inflation. Check the price of gold for a more realistic, on the ground, hits households in the gut measure. Price inflation will continue as far as the eye can see, checked only by increasing total productivity due to advancing technology, in my opinion. I'm going with what I've witnessed for about 50 years I've been paying attention as a professional economist out of the 76 years I've been on the planet.
Fifty years is about right. Got my PhD in Econ/Quant at NYU GBA in the 70s. Listened to lectures by Volcker, chatted with Greenspan walking down Broadway. Now I feel like Rip Van Winkle, where all that knowledge is now passé.
Hi Professor, the two periods look even more similar when you adjust the old measure for current concepts. As Bolhuis, Cramer, and Summers show: Past and Present Inflation were more similar than you think. https://www.nber.org/papers/w30116
Also, the fact that mortgage rates used to enter directly (and with not insignificant rate) into the CPI led to Fed loosening mechanically making inflation seem weaker and vice versa. That explains some of the movements you outline. BCS conclude that this is why getting a similar amount of disinflation these days is more difficult.
Thank you for this thought-provoking piece. FTPL makes sense to me intuitively, even though it is difficult to test its predictions empirically. Given that we don’t see government budget surpluses very often, it seems to me that this theory predicts that we are up for a devastating inflationary spiral that the Fed will never be able to contain. Is BTC potentially a lifeboat for those of us who are increasingly worried that we are riding on a sinking ship?
We are in for inflation "as far as the eye can see" as they say, regardless of FTPL, unless ...., unlesss ...., dare I say it? Unless Ai combined with nanotechnology increase productivity so rapidly that all the stupidity politicians have already engaged in becomes irrelevant.
This would be equivalent to a miracle. We need to find a way to tie politicians’ hands to control their wealth confiscatory impulse and prevent them from squandering our wealth and our children’s future. The current fiscal regime is completely unsustainable
There is no technology within the real economy capable to outrun the "printing press". And there will never be.
"There is no money" should be a meaningful phrase, government default should be explicit, base money should be physically anchored. An international gold standard is the only thing as credible fiscal commitment.
Don't get me wrong. I'm not saying price inflation is no worry. It is, but not for the reasons that most people think. The biggest problem with price inflation is that it puts purchasing power directly and immediately in the hands of government operatives. By the way, the gold standard didn't prevail for reasons. What will we do about those reasons? We have a better way at our disposal; it's called Bitcoin.
The main fiat currencies are better than Bitcoin, because their value comes from debt (there is a banking system behind the fiat currencies), that is linked to the real economy. This is why their value doesn't fluctuate that much as the price of Bitcoin. No, Bitcoin is not the way - you can gamble on it for pleasure and that is its economic significance. Miniscule significance. It's a toy, not money or currency.
Note that the Federal Funds Rate went up in 1973 while inflation was relatively low (3%), and a year later, inflation spiked in an identical pattern. In that case, one suspects that raising rates caused inflation. The interesting relationship is between a liquidity ratio (M2/GDP, the inverse of 'velocity of money') and inflation. A careful decline of that ratio represents a shrinking of the money supply to balance economic activity, and that's exactly what happened in the 1990s, when inflation eased to the 2% range for the first time in 40 years. To see this clearly and understand what happened in 2020-2023, read my paper, http://www.discenza.com/discenza-Inflation.pdf.
I hesitate to draw much of a conclusion from one or two cycles. I don't argue with your conclusion, simply the idea of looking at one cycle and saying it resembles another.
Please tell us more stories about “a one-time increase in the price level is not inflation” Things like tariffs and a one-time increase, mark to market revaluation of US gold reserves 42/2900 levering 8100 Metric Tons.
Economists and Fed may look through these as one-time, but ordinary people see through a glass darkly.
I think the proper time to start the plots is around 1965, maybe a little earlier. I used to do these graphs for my undergraduate classes to show that usually the difference between the fed funds rate and the rate of inflation was not high enough for the real rate of interest to be high enough to slow inflation. Most importantly if you plot the FFR with inflation over the next year you will see in the early 70’s the real rate was not above future inflation, and I do realize that future inflation is not the best proxy for expected inflation.
Through years of trying total capacity utilization was the only variable I could find that told whether inflation was going to increase or decrease, but after the late 80’s it was rarely high enough to predict an increase in inflation, rarely above 81%. My memory may be a bit off here.
The situation was different in the 1970s. During the 1970s private firms centered their capital budget planning and operational budgets on the assumption that the rate of inflation would be a steady 12% per annum. In effect, management was countenancing supplier price increases of 12% annually. Wage increases also settled at 12% per annum. Interest rates, nominal interest rates, on savings account balances were 10% to 14%; mortgage rates peaked at 22% per annum on 5-year term mortgages (25-year amortization). It was a different environment entirely from the environment of the 2019-2024 period. The economic environment of the 2025-2028 period remains unknown, but it is not commencing auspiciously. The chaotic start to the Trump administration this past month presages a chaotic policy environment and upended international trade patterns and a more fraughtful realignment of international security arrangements with the U.S. seemingly intent on going it alone. These factors were not present in the 1970s, or if present were not so intent on upending the status quo ex ante as this new administration's reordering of western global trade and security alliances will be if the displayed pronouncements of the president and his administrative aides since January 20th are any indication to go by.
"The chaotic start to the Trump administration this past month presages a chaotic policy environment and upended international trade patterns and a more fraughtful realignment of international security arrangements with the U.S. seemingly intent on going it alone."
So getting rid of corruption and fraud is chaotic. OK - I'm good with chaos, I guess.
If there is corruption and fraud in the government of the U.S., then it will not likely be found, or if found it is unlikely to lead to successful prosecutions through the federal courts. What this appears to be is a case of regime change on a scale that is unprecedented. The typical transition from one president to another would entail the dismissal of the political appointees of the outgoing administration without entailing the wholesale dimissal of the civil service personnel. Now, that is an internal matter (in terms of the U.S. as a nation-state), that does not affect the broader international economy to any significant degree. Presumably there will be some form of welfare improvement arising from lower costs in delivering government services to the nation. If there were no welfare gains arising from the "chaos" or if the welfare gains achieved by "chaoic administrative measures" were less than the welfare gains achievable via better planning and more systematic implementation then "chaos" is a poor choice as a modus operandi.
In the case of international trade relations and international security arrangements, "chaos" is likely to welfare reducing for the U.S. and its foreign national counterparts. Autarky is an unlikely candidate to improve welfare generally in the U.S., but it may enrich a few special interest groups and in that sense it is politically rewarding to those who can take advantage of it. On international security, "chaotic" is not a term that would gain much buy-in by foreign governments that the U.S. may have to rely upon at some point in future. Since the U.S. Joint Chiefs of Staff have conceded that the U.S. is at this stage unable to fight a two-front war, if it should materialise, the U.S. cannot afford to alienate its allies despite what the president might believe.
"Autarky is an unlikely candidate to improve welfare generally in the U.S., but it may enrich a few special interest groups and in that sense it is politically rewarding to those who can take advantage of it."
1) Trump and Musk are not uncovering the Biden Fraud, rather it is uncovering the Uniparty fraud of decades. It is chaotic looking to those who have been utterly asleep at the wheel. It is the similar in many ways to what Milei is doing in Argentina and it is exquisitely beautiful.
2) Autarky - Well, if you believe in airy-fairy free trade macroeconomics in an academic sort of way, I get it. That is not what is about to happen. There are trading "partners" who want us destroyed and the main one is Communist China. The faster we can get building stuff here, the faster we stop enriching Xi's monster country and the faster we are not reliant on China. If that causes a rise in marginal prices, I'm good with that. That is the price of freedom and liberty in this case. China is at war with us. You may not like this war, but the war likes you.
Shifting lines...Hut! hut! Omaha! Right..I guess if Covid comes back in a more virulent form or Bird Flu steps up and we have Pandemic-II and the health dept people shutter the economy and the Fed dallies again and the fiscal spigot...well, you get the picture. The lines on the chart create a correlation, but there is a lot of stuff behind the scenes - stuff that matters. As you mention a severe recession, spiking oil prices, an Arab oil embargo of the US—Nixon closed the gold window in 1971—a bit earlier...yeah a lot of stuff there apart from fed funds Vs inflation. There was a protracted fall in productivity too , probably related to high oil prices and environmental mandates that mandated investment but did not account in GDP for any air or water clean up that resulted.
I have been concerned that this inflation problem BEGAN mid-1960s to 1980s. The story was one of too little too late. It was true with or without recession and regardless of recession severity. Even when the Fed did hike rates in a more timely fashion (1974-75) rates did not linger higher enough; rates were cut too soon and too sharply. This was all kicked off by a mid-196Os 'soft landing' when the Fed hiked rates then stopped! No recession; inflation that had flared fell back but, claissically, did not fall back to its pre-tigheing speed. Nether did inflation get back there after the 1969-70 recession or the 1973-75 recession... Do we see a pattern? It is not just FF>inflation. It is F>Infl for long enough to produce a decline in inflation. This is why the current policy scares me with or without Trump. The Fed did not stick with it and is now operating off forecasts and cutting rates reducing teh premium of FF over inflation. Who could possibly think this is a good idea? Maybe some PhD who would point out to this dumb commenter that M-poilcy works with a lag and so must be preemeptive and must rely on forecasts.. OK I do get it. But even when the forecasts are terrible? Its like this: you are lost in a strange city so naturally you hire a guide. You employ another visitor who is also lost to help you. GREAT! I DON'T THINK SO. That is the caveat. Reacting quickly to more reliable actual data makes more sense to me. Economists like many professionals are trapped in a paradigm of their own making. They have been doing it too long they do not even think about the logic of it any more. Then there is the little matter that eonomiic models do not and have not forecasted inflation well. and John's view of the FTPL. So we are really far more lsot than anyone admits. and we are supposed to have anchored inflation expectations?? How could anyone belevie in that??
I think it is funny how the Keynesians are in mourning over the potential huge cut in government spending. The multiplier effect of government spending on GDP is 0 or maybe even negative. Hence, they are calling for a recession and with it lower interest rates.
Instead, I think that we might see lower interest rates due to decreases in energy prices, decreases in labor costs due to more people on the market looking for work as government slims down, and lower home prices as homes come on the market.
Conversely, if deregulation happens, combined with lower taxes, we could see a lot of private growth.
What are you using as "inflation"? CPI? Or PCE? Both measures are imperfect. If you look at price of gold in dollars (a market measure rather than a govt.-generated one) the 70s also look painful but the story 2005 to 2025 is something else. https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart
The Fed switched to core PCE in 2000….and from 2005-2008 CPI was elevated but core PCE was only slightly elevated. People seem to have forgotten that CPI hit 5.5% in July of 2008. Gee, what else happened around that time? 😉
What if the ideas of Fischer Black and Eugene Fama called the "New Monetary Economics," which was recently discussed and summarized by Tyler Cowan and Alex Tabarrok in their Marginal Revolution podcast is spot on? What if the Fed has no real ability to control "the money supply," a term that isn't really well defined?
I would find it extremely interesting to read or listen to John Cochrane's thoughts about the NME and how those ideas accord with FTPL. I must say that I find NME quite compelling.
The idea that the Fed has no control over the money supply is nonsense. Look at 2020, when the Fed instituted monetary expansion policies, driving M2 to an all-time high in December. At the same time, COVID slowed economic activity and reduced the need for money—a perfect storm for triggering 2021 inflation. Read my paper: http://www.discenza.com/discenza-Inflation.pdf
Yes, of course. The Fed can absolutely force a reduction in bank reserves. But as Tyler and Alex seem to agree, the Fed has marginal effects, and the shadow banking system can offset whatever the Fed does at the margin, perhaps.
I suggest you read up on the Fed's Open Market operations and how they can add/remove money from the system. Under today's Fed policy, Reserve requirements are not in play.
The 2021 inflation didn't need a perfect storm, although I agree with your analysis. The perfect storm is Congress and its complete lack of any effective budget constraint. Price inflation is at least 8 or 9 percent, never mind CPI inflation. Check the price of gold for a more realistic, on the ground, hits households in the gut measure. Price inflation will continue as far as the eye can see, checked only by increasing total productivity due to advancing technology, in my opinion. I'm going with what I've witnessed for about 50 years I've been paying attention as a professional economist out of the 76 years I've been on the planet.
Fifty years is about right. Got my PhD in Econ/Quant at NYU GBA in the 70s. Listened to lectures by Volcker, chatted with Greenspan walking down Broadway. Now I feel like Rip Van Winkle, where all that knowledge is now passé.
Please read my paper http://www.discenza.com/discenza-Inflation.pdf
Now do 2004-2009. We had elevated CPI from 2005-2008 with it peaking in July 2008 at 5.5%.
Hi Professor, the two periods look even more similar when you adjust the old measure for current concepts. As Bolhuis, Cramer, and Summers show: Past and Present Inflation were more similar than you think. https://www.nber.org/papers/w30116
Also, the fact that mortgage rates used to enter directly (and with not insignificant rate) into the CPI led to Fed loosening mechanically making inflation seem weaker and vice versa. That explains some of the movements you outline. BCS conclude that this is why getting a similar amount of disinflation these days is more difficult.
Thank you for this thought-provoking piece. FTPL makes sense to me intuitively, even though it is difficult to test its predictions empirically. Given that we don’t see government budget surpluses very often, it seems to me that this theory predicts that we are up for a devastating inflationary spiral that the Fed will never be able to contain. Is BTC potentially a lifeboat for those of us who are increasingly worried that we are riding on a sinking ship?
We are in for inflation "as far as the eye can see" as they say, regardless of FTPL, unless ...., unlesss ...., dare I say it? Unless Ai combined with nanotechnology increase productivity so rapidly that all the stupidity politicians have already engaged in becomes irrelevant.
This would be equivalent to a miracle. We need to find a way to tie politicians’ hands to control their wealth confiscatory impulse and prevent them from squandering our wealth and our children’s future. The current fiscal regime is completely unsustainable
Maybe, but advancing technology is the only thing that's saved us so far ever since 1913.
There is no technology within the real economy capable to outrun the "printing press". And there will never be.
"There is no money" should be a meaningful phrase, government default should be explicit, base money should be physically anchored. An international gold standard is the only thing as credible fiscal commitment.
Don't get me wrong. I'm not saying price inflation is no worry. It is, but not for the reasons that most people think. The biggest problem with price inflation is that it puts purchasing power directly and immediately in the hands of government operatives. By the way, the gold standard didn't prevail for reasons. What will we do about those reasons? We have a better way at our disposal; it's called Bitcoin.
I see in Bitcoin scarce nothingness only. :-)
The main fiat currencies are better than Bitcoin, because their value comes from debt (there is a banking system behind the fiat currencies), that is linked to the real economy. This is why their value doesn't fluctuate that much as the price of Bitcoin. No, Bitcoin is not the way - you can gamble on it for pleasure and that is its economic significance. Miniscule significance. It's a toy, not money or currency.
Joseph H. Discenza
Note that the Federal Funds Rate went up in 1973 while inflation was relatively low (3%), and a year later, inflation spiked in an identical pattern. In that case, one suspects that raising rates caused inflation. The interesting relationship is between a liquidity ratio (M2/GDP, the inverse of 'velocity of money') and inflation. A careful decline of that ratio represents a shrinking of the money supply to balance economic activity, and that's exactly what happened in the 1990s, when inflation eased to the 2% range for the first time in 40 years. To see this clearly and understand what happened in 2020-2023, read my paper, http://www.discenza.com/discenza-Inflation.pdf.
The data disagrees with you:
https://arkominaresearch.substack.com/p/demystifying-inflation?r=1r1n6n
I hesitate to draw much of a conclusion from one or two cycles. I don't argue with your conclusion, simply the idea of looking at one cycle and saying it resembles another.
https://www.clevelandfed.org/indicators-and-data/median-cpi
Please tell us more stories about “a one-time increase in the price level is not inflation” Things like tariffs and a one-time increase, mark to market revaluation of US gold reserves 42/2900 levering 8100 Metric Tons.
Economists and Fed may look through these as one-time, but ordinary people see through a glass darkly.
Tell/sell it to Ma & Pa Kettle :) https://youtu.be/jSrPlf4GBHc?si=-P9Vr4JIiltJV5bj
https://convex-strategies.com/2025/02/17/risk-update-january-2025-is-it-working-yet/
I think the proper time to start the plots is around 1965, maybe a little earlier. I used to do these graphs for my undergraduate classes to show that usually the difference between the fed funds rate and the rate of inflation was not high enough for the real rate of interest to be high enough to slow inflation. Most importantly if you plot the FFR with inflation over the next year you will see in the early 70’s the real rate was not above future inflation, and I do realize that future inflation is not the best proxy for expected inflation.
Through years of trying total capacity utilization was the only variable I could find that told whether inflation was going to increase or decrease, but after the late 80’s it was rarely high enough to predict an increase in inflation, rarely above 81%. My memory may be a bit off here.