For those old enough to recall the 1970’s, the present economic turmoil looks a lot like the stagflation from fifty years ago. Just like a half century ago, we have a mix of inflation, economic stagnation and incompetent leadership in Washington. Joe Biden is not exactly Jimmy Carter, as Carter was an honest man, but like Carter, the public sees him as a man out of his depth. Like Carter, he wound up in the job due to a crisis within the political class over a previous president.
It is a comforting parallel for many people, because if the pattern holds, it means there is a Ronald Reagan coming after Biden. The saner elements in the ruling elite will rally to a sober minded governor who can withstand the progressive crazies. Many people are looking at Ron DeSantis as the man who can save the system. Trump running in 2024 could throw a wrench in the story, but maybe the ruling elite has a plan to get that element out of the script so the story can continue.
This problem with the script is a reminder that historical parallels are like all generalizations in that they are a starting point. They help frame the times to better understand the details. We know the general plot of one side of the comparison, so it allows us to infer things about the other side. From there we have a basis from which to analyze the present. In this comparison, however, the observable similarities have different direct and root causes.
For example, the current energy crisis is different from the crisis in the 1970’s, which was mostly driven by the currency war and an oil embargo. The collapse of the post-war currency arrangements not only gave us inflation, but it also created havoc in commodities, which are sensitive to currency fluctuations. The big driver was the Arab oil embargo over US support for Israel. The embargo was always a short term strategy to get a better deal from the West.
The present energy crisis is primarily systemic. Generations of mismanagement are finally showing up in the price. The United States was the largest exporter a few years ago, but then the government reversed course and exports have collapsed, making America a net importer again. Europe is smashing its energy system in an effort to make the Russians look bad on Twitter. There is more than enough energy to go around, but the system to distribute it is collapsing.
In the 1970’s, the solution to the energy crisis was to make a deal with the Arabs so they would end the embargo. There were lots of new energy schemes launched to take advantage of the crisis, but the final solution was a deal with the Saudis. This current energy crisis does not have a simple solution. In the West, energy policy has been corrupted by the same cranks who have corrupted the culture. It will take a revolution to fix that problem in order to fix the policy problems.
Systemic problems are also at the heart of the inflation crisis. In the 1970’s, the issue was the old fashioned Econ 101 problem. There was too much money chasing too few goods, resulting in inflation. This time, the issue is more about systemic problems in the global monetary system and in the global supply chain. This is where dumb people like to say, “it is as simple as…” and then finish with their favorite bromides from the Mises Institute, but the current inflation crisis is not a simple one.
For starters, the monetary system that was put in place in the 1980’s assumed a few things that are no longer true. One was that the excess dollars created by Washington would be absorbed and laundered by low cost counties. This worked while Asia had an infinite supply of cheap efficient labor. Extra dollars could flow into these countries as economic investment. The extra from developing countries would then return in the form of assets like treasuries and equities.
That system is breaking down for two main reasons. One is China is becoming a mature industrial nation, which means labor is no longer cheap. The Chinese understand this and they are shifting policy to encourage domestic consumption rather than focus on exports. All of a sudden, those extra dollars are no longer as welcome in China as in the past. Instead of returning as assets to America, they hang around the system chasing too few retail goods.
