World War II, M2 and Vision of the 2020s

In the 1940s, the price of Cadillac cars soared from US$1,745 in 1949 to US$3,497. This was part of the price increase shortly after the United States won in World War II. However, by the 1950s, the inflation rate fell below 2%.

Atlanta Fed, In the fascinating research report published this monthIt reveals the reasons for these short-lived price pressures, and these pressures provide useful guidance for the nature of the cost increase we are seeing now.

Prices began to rise in 1946. It may be due to the rising prices of automobiles and other durable consumer goods, and the war years are commodities that were not produced during the war when the production capacity was dedicated to the manufacture of military equipment. Partly due to the shortage of these commodities, savings soared after the United States entered the war in 1941. The removal of price controls and the restart of the production line after the announcement of victory in 1945 led to wave after wave of increased demand (and understanding of quantitative commodities traded on the black market). When inflation peaks, it reaches 20%.

4.2%, The inflation rate in the United States is far lower than today. It is also unlikely to reach these heights again in the near future. However, with the relaxation of lock-in restrictions, we have seen similar types of price pressures. As FT Alphaville Reported last week, The price increase of the car price (used car in this case) is triggering an alarm. Although the reasons for this surge are mainly driven by supply-side factors (such as semiconductor shortages), the demand-side also has concerns. It is worth noting that the government’s proactive fiscal response will release a wave of suppressed demand.

Some people say that the amazing growth of the M2 currency measure-including some savings deposits other than central bank reserves, currency and time deposits, and this is mainly driven by the nature of government stimulus policies-proves that we are looking at the return on inflation.

From the St. Louis Fed website:

Of course, we also saw the same increase in government spending during the war years.

So why can’t it last more than two years? The paper attributed this surge to the increase in the velocity of money, that is, the speed of currency transactions, which is a proxy for demand. After the war, people entered the shops one after another. But that kind of crazy consumption did not last. Expectations for inflation are not deeply ingrained either. As a result, coupled with a reduction in government spending, the speed and inflation rate quickly returned to levels during the conflict:

After the conflict, at the Ministry of Finance, the deficit quickly turned into a surplus. In 1946, as the demand for government financing ceased, currency growth suddenly stopped. Therefore, the price increase that year was a direct effect of the rapid increase in currency circulation. In the end, the price increase further diluted part of the huge debt burden and further promoted the stability of the government’s finances. Indeed, by 1948, about 40% of the government’s actual debt burden had been reduced.

Although Fed officials expressed concern about the outbreak of inflation, at first they took almost no action and therefore suspended their intervention in the Fed. [control of the yield curve for US Treasuries] Only in the middle of 1947. Since then, the Fed has implemented a series of tightening policies. These policies mainly involve the increase in reserve requirements and discount rates. The common contractionary monetary and fiscal stance culminated in the economic recession of 1949, and the inflation rate stabilized again at 2%. However, the economic recession was short-lived, followed by strong economic growth and rapid improvement in overall living conditions.

One factor that led to the rapid reversal of inflation is that the public never anticipated an inflation spiral like in the 1970s. They believed that the increase in inflation was temporary. The deflationary prejudice after the Great Depression still exists.

So, will we see the same trend this time?

This will certainly happen to the Fed, saying that any inflation may prove to be “temporary.” There must be many similarities between that era and this era. But the past will never repeat itself completely.

In terms of its value, we believe that some of the supply constraints that are now eased may take longer, which will intensify price pressure. We are not entirely convinced that people expect inflation to fall back quickly, even though the Fed has repeatedly stated that this is the expected situation. At the same time, even if the savings increase substantially, we do not believe that we will see people as crazy as they were after World War II. The pandemic changed the economic landscape. Our suspicion is that with the removal of stimulus measures, bankruptcies will increase and cause unemployment. In this case, people like to set aside some money.

To draw your own conclusions, please read this article in its entirety. It is relatively short, but it has a deeper understanding of the mechanisms that lead to inflation than almost everything else we have read on this topic recently. Once you are done, we will appreciate your usual thoughts.

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