Lessons for the present from the Postwar Boom
Lessons for the present from the Postwar Boom
One of the things I harp on from time to time is that from 1932 to 1956 there was never a yield curve inversion, and yet recessions certainly did happen! Too many modern models get hung up on Fed intervention.
But what happens when the Fed doesn’t intervene, as was the case for that 25 year period? Or is perhaps the case now, with the Fed funds rate at record levels below the inflation rate?
The case of the immediate postwar Boom of 1946-48 and the recession of 1949 bears a lot of similarities to our current situation – but some significant differences too.
I wrote a lengthy post about it, and it is up on Seeking Alpha.
A factor I didn’t even get into in that discussion was how the GI Bill and the swift integration of returning servicemen into the labor force mirror the swift increase in re-employment of those laid off during the initial period of lockdowns and closures.
For example, the modern unemployment rate statistics just started to get published in 1948, and like now, it was close to 3%:
As usual, by clicking over and reading, you should learn some important historical information, and it also puts a couple of pennies in my pocket as well.
i would love to read this…at least read enough of it to know if i wanted to read the rest.
but my clicking skills are not the best at any time. and i especially don’t want to “sign up” to another web-site.
I bet that AB would be glad to run a synopsis at least.
Coberly,
In order to duly consider the roll of short term versus long term treasuries interest rate inversion in either causing or being a leading indicator of recession, then one should first consider “why should US treasury term-based interest rate inversion have a negative economic impact?” Even the reason is not entirely clear.
As a leading indicator, then the theory would be that investors, who are notoriously well-informed about the economic state of the United States, are convinced that inflation will be higher in the short term than over the long term. IOW, investors are convinced that the present boom will end in doom. In general the larger part of the investment community by share of wealth are better informed than the little people, but often miss big stuff such as 2007/08. However, the big investors are clever enough to bet against the Fed’s ability to manage inflation without creating a mess.
Furthermore the theory regarding treasury term interest rates inversion as a cause is that financial intermediation is impaired when holding short term treasuries has a higher payoff than holding long term treasuries. Mark Sadowski offered that explanation to me a long time ago. Not being a banker or economist, then I can only take his word for it.
There may be other better theories regarding the relationship between treasury term interest rate inversion or maybe there are not. However, one thing for certain is that the roll of financialization in the US economy is far larger now than in the immediate post WW-II period.
Mark Sadowski is an economist of the market monetarism school of thought. Whether that makes him respected or scoffed depends upon one’s POV on economics in general and monetarism in particular, although MM and MMT are sworn enemies. IMO, Mark is neither sage nor fool, but worth hearing out and filing in the monetarism folder for future reference. Economics can be very complicated, but humans can be very simple.
Ron
thanks. have you ever tried to understand inflation by imagining what you would do if you were poor, rich, knowledgeable, indoctrinated…. I have tried briefly and may be gaining some insights, but being neither knowledgeable nor indoctrinated have been unable to arrive at any firm conclusions. i just suspect the Fed and the markets are operating based on first a very limited academic model of inflation, and second mostly a pretty good idea of what everybody else is going to do based on a very limited understanding of that model. I suppose they get it right…except when they get it wrong.
firt thing that strikes me is that inflation sould be self limiting: prices go up, people spend less (from an earlier chapter in the academic model) so prices go down. in order for inflation to “accelerate” there needs to be a source of extra money…government printing, bank lending, those who can paying more (drawing from otherwise unspent savings? or from other spending not affecting the immediate economy ?) the idea of wage pressure does not fit my reality, and the idea of control by interest rates reducing investment seems to be a way to change loss of real income from inflation to loss of real income through layoffs and depression, especially if there are sources of monopolistic supply limitations. anyway, it’s just a thought.
Coberly,
You are on the trail of inflation, but it is a tricky beast. Prices rise more easily than they fall (downwards sticky). Expectations give rise to prices, but not without opportunistic taking of economic rents and sometimes downright price gouging. The so-called 70’s stagflation was a perfect storm of rising OPEC oil prices paired with technological obsolescence of many forms of mid-wage and low-wage labor and a growing trade deficit.
With both pandemic and war, then it may take a bit to sort out all that is feeding the inflation beast this time around. Most people still have not figured out the 70’s bout of inflation yet.
yes, i suspect no one has figured it out yet. it took a long time for raises in interest rates (whatever happened to the free market?) and the Reagan Recession (are you better off now?) to stop it.
i don’t know enough to understand the factors you cite…i have been told the opec supply chain interruption (plus Johnson’s guns and butter deficit) started it and unrealistic wage demands accelerated it. but i am guessing the money had to come from somewhere, and it seems to me that other people than workers were in a better position to raise prices, and wages never kept up, just as they are not keeping up today. i think the Fed interest rate game may have more to do with protecting bond holders and lenders from “the market” than protecting people on fixed income…. but haven’t really straightened anything out in miy mind. don’t want to have to go to school to learn what “everyone knows.”