Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
We are hearing here and there referenced the 1970s to justify further monetary repression. The protagonists of this narrative should know better than making such comparisons.
For some of them have lived through this period, they know full well we are in different times, driven by different monetary and economic dynamics. The 1970s is a transition period out of the Bretton Woods system, put in place just after World War II:
- The financial system is not very sophisticated with a limited derivative market footprint.
- Capital controls still exists in certain advanced countries with its impact on international money flows.
- Private and public debt levels are limited.
- Central bankers are unknown civil servants.
- Quantitative easing does not even appear in any economic textbook.
- The demographic structure of the West points to a young, up and coming population looking to work and consume. They call them the baby boomers.
- China’s GDP is smaller than that of Algeria, and China is miles away from joining the World Trade Organization as a leading trading partner.
- The European Union is a small band of Western European nations forming a common market trade area without even a common currency.
- The Suez Canal is regularly closed off due to conflict in the Middle East: forcing oil tankers to take the long route round, taking three times as long to get to destination.
- A large portion of the world’s oil production is concentrated in a limited area, subject to constant geopolitical instability.
- New alternative sources of energy, such as nuclear have yet to be developed and rolled out on a world scale. Just in time is considered a dangerous management tool as supply chains could be regularly disrupted by transportation issues, dockers or train strikes, for example.
To conclude, comparing the complexities and moving parts of the 1970s to those of today. Is intellectually questionable. So too is the proposal of a 70s style solution, such as high interest rates for longer to crush today’s inflation as the supreme Monetary Authority over commercial banks, which was not the case in the 1970s, central bankers could have chosen to constrain private lending. Less credit would mean less money to chase too few goods, snipping the bud of inflation. That solution is never talked about by those same people making these comparisons to the 1970s.
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