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Happiness On A Monday Morning

07/20/2015

Everybody has their memory of living with inflation during the late 1970s.  One of mine was early on a Monday morning in the offices of an insurance company that was buying a construction loan I had made for a large apartment property to be built.  When we arrived, we noticed that everybody was far, far too happy for a Monday morning.  Something had obviously happened to make these people so happy.  Then, we learned that everybody in the office had just been given the news they were receiving a 9% raise to compensate for inflation – no wonder they were so happy!

Eventually, Paul Volcker crushed inflation by raising interest rates as high as 20.5%.  Of course, that also induced a recession.  The lesson was clear:  To crush inflation, create a recession.  Every Fed Head since Volcker has lived with the fear of inflation, because they don’t want to create a recession, which drives up unemployment.  Fortunately, there has been only minimal inflation since those days.  In fact, some Fed watchers have been more concerned with deflation, which is a far more difficult problem to control.

The latest data indicates a slight pick-up, very slight – core CPI has held steady at 0.2% a month for six straight months, with food CPI up 0.3% primarily due to Avian flu.  This is good news, because the Fed wants to see a minimum annual rate of inflation of 2% at least.  A little inflation is good, but too much is bad, very bad!

Most analysts believe this makes an interest rate increase in September more likely.  By itself, I agree, but that ignores the concern this particular Fed Board has about unemployment, as well as the pressure from other nations to keep the U.S. economy running as fast as possible.  Plus, exporters are living in fear of a stronger dollar, which happens when you increase interest rates.  Because of all this, I’m doubtful the Fed will raise interest rates this year . . . we’ll see.

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