Jubak's Journal
Recent articles:
• 5 growth stocks for a weak-kneed rally, 5/20/2005
• 5 stocks aided by rising prices, 5/18/2005
• Get ready for a nice growth surprise, 5/17/2005
More...
| | Jubak's Journal
The Fed is all wrong about inflation
(Page 2) of 2
 Previous
The advantage of wealth: In the first half of a price wave, the wealthy are able to stay ahead of inflation by demanding tax cuts as they did in the run-up to the French Revolution, increasing rents on their property, demanding subsidies from government and using the power of the government and the courts to force increasingly impoverished wage-earners to pay their debts.
Wage-earners, on the other hand, lose ground steadily to prices. And to taxes. Governments, facing their own debt crises as prices rise, attempt to raise taxes. But those taxes aren't distributed equally among the population, since the wealthy use their political clout to get themselves exempted from the tax increases.
Rising pessimism: The rising prices of a long price wave have a psychological effect on a society. As inequalities rise, optimism gives way to pessimism. Since price waves are accompanied by increases in violence, family breakups, alcoholism and poverty, there's a growing sense in a society that something is wrong. Could the sense that something has gone wrong in this country that shows up in current opinion polls -- shared by conservatives and liberals, by the devout and the secular -- even if we don't agree on what it is or how to fix it, be an instance of this shift in social psychology?
Finally, crisis: As prices rise, the economy and the society become increasingly stressed until a bit of bad luck that would have been shrugged off earlier leads to a crisis. So, for example, by 1789 a wage-earner in France was spending 88% of his income to feed his family. In the period from 1726 to 1791, it took only 50% of income. So when the harvests failed in 1788 and 1799 and prices soared, as they had done in earlier years of bad harvests, it was enough to tip the country into chaos. Make up your own list of tipping points for today's economy.
Where Fischer left off
Fischer's book ends with a discussion of the price wave that began in 1896 and continues today. But the book was published in 1996, so it doesn't discuss the rise of China and India, the U.S. debt bubble or Washington's fiscal crisis. Let me try to add those events to Fischer's framework.
First, adding the 2 billion consumers of China and India to the global economy is our century's equivalent of the population increases that Fischer posits as the cause of earlier price waves. This is a massive increase in global demand, and we're seeing the expected increases in the prices of food, fuel and other basic commodities. And we're seeing the stable of declining prices of manufactured goods that are typical of the first half of price waves.
Second, Fischer is a subtle-enough historian to realize that the changing nature of governments and societies changes the possible response to a price wave. He notes, for example, that social relief programs that date back to the 18th century have been critical in reducing the degree of suffering among the poor during more recent price waves. I'd add that the expansion of political power from a narrow elite as in pre-revolutionary France to the voting population of today's America has changed the way that the society responds to the initial stages of a price wave. Real wages still fall in today's United States because of rising prices, but thanks to credit cards and home-equity lines of credit, you don't have to be the Duc de Deux Ponts to find a way to keep up with inflation. (In 1786, the Duc said about the peasants, "It is in our interest to feed them, but it would be dangerous to fatten them.")
Third, we don't know where we are in this price wave. If it started in 1896 and lasted 80 years -- the minimum for the waves Fischer studied -- it would be over by now. If it lasts 180 years -- the maximum for previous waves -- it will end in 2076.
I think this price wave still has years to run, and when it ends and how it ends depends not on some mechanical theory of history but on the decisions we make now. As Fischer points out, the collapse of the French monarchy, the bloodbath of the French revolution, and the world war unleashed by Napoleon were by no means preordained.
Fischer writes: "By 1787, Europe's most powerful government (France) was on the edge of bankruptcy. Ministers tried desperately to balance their books. Economies were enacted. The king himself, Louis XVI, set an example by reducing his household expenses from 22 million livres to 17 million, largely by consolidating the royal stables. The financial ministers of Louis XVI pleaded desperately for more revenue, and were refused. The possessing classes refused to accept new taxes. Many demanded more privileges and exemptions. This combination of public need and private greed was fatal."
So how will this wave end? It's our choice.
New developments on past columns
5 growth stocks for a weak-kneed rally
As I wrote in my May 20 column, I've got my doubts about the staying power of the current rally. But investors did get a major positive sign last week when the New York Stock Exchange reported that short interest climbed 1.54%. That's the fifth increase in a row. Short interest is a measure of how many shares of a stock (or in this case, of all stocks) traded on the NYSE have been sold short. The number is important in trying to gauge the potential strength of any rally, because investors who are short a stock are betting on it to fall in price. When the stock instead starts to move upwards, short sellers often decide to buy shares to cover their short sales in order to limit their losses. That buying by short sellers provides important fuel for a rally. And when the short interest is high, as it is currently on the NYSE, there's more fuel to keep a rally going. Philip Erlanger, who charts short intensity (short interest corrected for trading volume) for his newsletter, Erlanger Squeeze Play, sees major jumps in short intensity in energy minerals, consumer services, health technology, finance, health services, consumer durables, consumer nondurables, producer manufacturing and process industries. The Nasdaq, which reports short interest independently from the NYSE, is set to issue its numbers today, May 24.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares of any equities mentioned in this column. He doesn't own short positions in any stock mentioned in this column.
|
