Ride The Wayback Machine for a Peak at '70s Inflation

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So let's join Sherman and Mr. Peabody and hop into the Wayback Machine, shall we?

Destination: March 24th, 1980.

That was the date of this Time Magazine article titled 'Jimmy Carter vs. Inflation'. Many faithful readers do not recall those days so if the topic interests you, click on the link and you can read the entire 10 page article.

Here is the 'Coles Notes' version...

As Jimmy Carter stepped before the television cameras in the East Room of the White House last Friday, his task was not just to proclaim another new anti-inflation program but to calm a national alarm that had begun to border on panic. Inflation and interest rates, both topping 18%, are so far beyond anything that Americans have experienced in peacetime—and so far beyond anything that U.S. financial markets are set up to handle—as to inspire a contagion of fear.

For three weeks the White House struggled to develop a plan that would restore the public's confidence that the Government could bring the economy under control... But the dramatized search for an anti-inflation program proved slow and frustrating. So on Friday afternoon, Jimmy Carter strode into the East Room, having carefully waited until half an hour after the major financial markets had closed in the East, to (speak to the nation).

Speaking earnestly and somberly, Carter opened by stating that "persistent high inflation threatens the economic security of our country," and that "this dangerous situation calls for urgent measures."

The troubles had been building up for more than a decade, said Carter, and they could be traced largely to "our failure in Government, as individuals and as a society to live within our means." Glossing over his own record of rapidly rising spending and huge deficits, both of which contradicted his firm campaign pledges of 1976, he proclaimed his born-again fiscal faith: "The Federal Government must stop spending money we do not have and borrowing to make up the difference."

He acknowledged that his program would be "difficult politically" and, by implication, "onerous and burdensome" to some needy people, though less so than continued inflation would be... But his new plan would succeed, though three previous ones failed, he asserted, because "the nation is aroused now as it has never been before, at least in my lifetime, about the horrors of existing inflation and the threat of future inflation."

In follow-up press conferences Saturday morning, Federal Reserve Board Chairman Paul Volcker proclaimed that "the greatest risk beyond doubt" facing the economy is accelerating inflation. "There is no way we can deal with the problems... other than by placing restraint on people who individually would like more credit."

As this barrage of resolute rhetoric might indicate, inflation is not only a frightening economic problem but is rapidly becoming Carter's most dangerous political liability as well. Front Runner Ronald Reagan has been hammering increasingly harder on economic issues and said in Illinois Friday night: "It's Government that causes inflation, and Government can make it go away by cutting out deficits and stopping the printing of money."

Credit controls. They will be imposed. Said Carter: "Inflation is fed by credit-financed spending. Consumers have gone into debt too heavily. Businesses and other borrowers are tempted to use credit to finance speculative ventures."

So what happened after this?

Massive spending cuts were instituted and many government benefits were slashed. More importantly numerous steps were taken by the Federal Reserve to choke off the lending of money by banks. Raising interest rates was only part of it. A significant campaign was launched to choke off credit lending itself.

This was March, 1980.

The interest rate was 18%.

One year later, the problems still existed and the Fed interest rate was jacked up to 21.5%. You couldn't get a mortgage for less than 22%.

The lesson learned from people like then-Fed Chairman Volcker (who is now Chairman of U.S. President Barack Obama’s Economic Recovery Advisory Board)?

Next time act faster to combat inflation by raising interest rates to similar levels and don't give the economy, lenders and borrowers time to adjust.

Ominous, don't you think?

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Email: village_whisperer@live.ca
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Oblivious

Yesterday the DOW plunged another 250 points to close at its lowest level in 12 years. It hasn’t been this low since May 8th, 1997.

Twelve years of financial gains have now been wiped out.

President Obama’s Advisory Board Chief is at a loss for a solution. "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world… you know, even the experts don't quite know what is going on."

That's a scary admission. It means the men responsible for finding solutions to our economic crisis admit they don’t know what is going on.

And now panic begins to truly grip the financial markets.

What does it all mean for Real Estate in the Village on the Edge of the Rainforest?

I am reminded of Boxing Day, 2004. Amid festive celebrations came reports of a massive tidal wave in the Indian Ocean.

Conditioned by Hollywood depictions of disaster, most people expected the initial images to show massive 150 foot curling waves of water descending on communities in a 'Poseidon Adventure' style of calamity.

The reality, while terrifying in its scope of destruction, was nowhere near that visually satisfying. As images of the disaster filtered out to the world, most of us were surprised to see that the ‘tidal wave’ was actually a massive ‘surge’ of water, as when a door is opened on a giant pen of water.

More intriguingly, reports from many of the victims revealed that the first sign of the horror to come was not a visible wall of water speeding towards the beach. Instead, it was quite the opposite.

Personal accounts of the tidal wave that killed more than 20,000 people in eight South Asian countries described how the sea suddenly disappeared a few minutes before the wave hit: submerged rocks became visible, fish flapped harmlessly on the sand and beaches suddenly stretched towards the horizon.

And since the last major tsunami in the region was more than 60 years before, few understood the significance of the drying-up of the sea.

"The water went back, back, back, so far away, and everyone wondered what it was - a full moon or what?" said Katri Seppanen, a tourist on Phuket Island's Patong Beach in Thailand. "Then we saw the water come, and we ran."

The disappearing beach phenomenon is simple enough to explain. A tsunami wave can travel thousands of miles across an ocean without losing power (one in 1960 crossed the Pacific after an earthquake in Chile and killed 200 people in Japan, more than 10,000 miles away).

But when it hits shallow water off a coast it slows right down and builds in height, creating a vacuum that sucks the water off the very beaches it is heading towards.

For the locals and tourists alike on that fateful Boxing Day in Thailand, they were drawn to the instant tidal flats like moths to a flame. One stunning pair of photos shows tourists walking out into the vast expanse of suddenly dry beach to explore; oblivious to the impending danger.

To me that photo stands as a perfect analogy of the Vancouver Real Estate market.

It has been almost 80 years since 1929 and the significance of the collapsing economy is as lost on most Vancouverites as surely as the drying-up of the sea was lost on those tourists in Thailand in 2004.

The wiping out of markets, the collapsing of the economy, our political and economic leaders perplexed at what is going on around us; all while we in Vancouver frolic on the economic beach of daily life, blissfully unaware of what is bearing down on us.

Realtors and home owners wait, hopeful for a spring bounce. There won’t be one.

There won’t be any American buyers coming to rescue our market. No Asian buyers or European buyers riding in to keep our land values afloat on the coattails of Olympic hype.

In short, there will be no saviors for our Real Estate market.

Sales, and there will be a paucity of them, will depend on the average Vancouver buyer utilizing the average Vancouver income, an income which will be battered by an very un-average economic crisis.

And what's left of that income won’t come close to supporting today's market prices.

We are like those tourists on Thailand’s Patong Beach. We are standing around, wondering what it is that is happening.

“Where have all the buyer’s have gone? Is it a full moon, or what?”

In a few months we will realize what is happening.

Then we will see the water come.

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Email: village_whisperer@live.ca

"This Isn't Any Ordinary Crisis" - Volcker. "Even the Experts Don't Know What is Going On!"

Paul Volcker is an American economist and was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987).

He is currently chairman of the newly formed Economic Recovery Advisory Board under President Barack Obama.

On Friday he said that the global economy may be deteriorating even faster than it did during the Great Depression and made the frank admission that, "you know, even the experts don't quite know what is going on".

Volcker noted that industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker told a luncheon of economists and investors at Columbia University.

Volcker, a former chairman of the Federal Reserve famed for breaking the back of inflation in the early 1980s, mocked the argument that "financial innovation" , a code word for risky securities, brought any great benefits to society. For most people, he said, the advent of the ATM machine was more crucial than any asset-backed bond.

"There is little correlation between sophistication of a banking system and productivity growth," he said.

The current crisis had its beginning in global imbalances like a lack of savings in the United States, but policy-makers around the world were too reticent to take action until it was too late, Volcker said.

Now that the crisis had erupted, it was important to take decisive actions, including a more effective regulatory structure and some movement toward uniform accounting systems, Volcker said.

He said all financial institutions that are deemed too large to fail should be subject to increased scrutiny, echoing the findings of the Group of 30, a panel of policy-makers and influential economists, which he leads.

Click Here to see Volcker's speech.

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