Why the Postwar 1940s May Tell Us More About Our Inflation Than the ’70s

As inflation stirs, economists have fixated on the 1970s. That’s a mistake, says Guggenheim’s chief investment officer, Scott Minerd, who believes the causes of the Great Inflation of the ’70s—funding the Vietnam War and Great Society, delinking the dollar from gold, energy crises—don’t relate to 2022. A more appropriate era, he says, is after World War II, when manufacturing disruptions, rising demand, savings and money growth drove prices.

Minerd’s argument is, in part, a defense of “transitory” inflation driven by pandemic supply-demand imbalances, just as 1946-48 had imbalances arising from the war’s near-cessation of consumer-durable production. About a year after the conflict ended, the consumer price index ran at a 3.1% year-over-year rate; it peaked nine months later at 20.1%, after explosive growth in the monetary base—currency in circulation and on bank balance sheets—and a Federal Reserve balance sheet up 300% from 1942 to 1945. (Today’s has risen 100% since March 2020.)

In the late ’40s, pent-up demand subsided, and supply rebounded. Minerd points to an overlooked factor: The Fed in 1947 ended the wartime peg on short-term Treasury rates, letting markets set them. That was possible, he says, because monetary policy was focused on the supply, rather than the price, of money and credit. The yield curve flattened, credit tightened, and a brief recession followed. By mid-1949, stocks were rising.

Minerd urges policy makers to limit credit creation by controlling the Fed balance sheet and money supply. He favors a “rational and disciplined approach adhering to monetary orthodoxy,” à la the 1940s.

Last Week

A Hawkish Powell

Investors got surprised by, of all people, Federal Reserve Chairman Jerome Powell when he said he was prepared to go with a half-point raise if necessary. Stocks plunged, then bounced. Bonds sold off, and the yield curve flattened; the war didn’t help. Despite that, stocks, still volatile, climbed. On the week, the Dow Jones Industrial Average gained 0.3%, to 34,861.24; the S&P 500 rose 1.8%, to 4543.06; and the Nasdaq Composite climbed 2%, to 14,169.30.

Bogged Down

Ukraine rejected Russian demands to surrender Mariupol, said it won victories around Kherson, and counterattacked around Kyiv. Russia continued bombing cities and appeared to suffer significant casualties. President Biden attended a NATO summit in Europe, which resulted in more sanctions, more warnings about chemical weapons, and a plan to ship more liquefied natural gas to Europe. The MOEX reopened on a limited basis, and Russian steel company Severstal may default. Separately, the U.S. and U.K. agreed to drop Trump-era tariffs.

Judge Before Congress

Federal Judge Ketanji Brown Jackson, the first Black woman nominated to the Supreme Court, parried GOP questions about her time as a legal-aid lawyer, her sentencing in child-pornography cases, and on issues like critical race theory. “I believe that judges are not policy makers,” she said.

Where’s the Debt?

China Evergrande said it could not meet demands for debt payments, and the property developer, its management unit, and Evergrande New Energy Vehicle Group—all listed in Hong Kong and viewed by investors as a source of funds in a restructuring—said they were unable to publish financials without further audits. Banks then seized $2.1 billion in deposits from the property services subsidiary. Other developers also delayed financials, raising fears of hidden debt.

China Crash

A Boeing 737-800 flown by China Eastern Airlines crashed, killing 132 passengers. The plane was a 737, not a 737 MAX involved in previous crashes.

Annals of Deal Making

Nielsen Holdings rejected a bid by a private-equity group that includes Elliott Management. Investor WindAcre, which holds 10% of the shares and 14% more in swaps, said it would block the deal if Nielsen went forward…Thoma Bravo agreed to buy Anaplan, a cloud-based software developer, for $10.7 billion… Berkshire Hathaway said it was buying Alleghany for $11.6 billion. Alleghany, like Berkshire, is an insurer with investments in nonfinancial companies…Logistics giant Prologis made a $23 billion bid for Mileway, Blackstone’s portfolio of 2,000 European warehouses….Toshiba shareholders rejected a plan to split the company…In one of the largest cannabis deals yet, Cresco Labs said it would acquire Columbia Care for $2 billion, making it the largest by revenue in the industry.