Comment by cs702 | Hacker News Reader

Comment by cs702 | Hacker News Reader

I'm reminded of this famous passage by Ernest Hemingway in The Sun Also Rises:

> "How did you go bankrupt?" Bill asked.

> "Two ways," Mike said. “Gradually and then suddenly."

In other words, at all times, Mike's march to bankruptcy was always obvious, but somehow he couldn't see it, or do anything about it, until it was too late!

If you read accounts about inflation in the mid to late 1970's, you'll see that by the time inflation started getting out of control, it was too late to prevent it. Inflation couldn't be brought under control until Paul Volcker aggressively raised interest rates, which was very painful for a lot of businesses and a lot of people. 10-year treasuries hit 16%/year. Mortgage rates hit 20%/year. Valuations for all kind of assets hit rock bottom.

It's not too hard to imagine the following Q&A a few years from now in some congressional hearing:

> Q: "How did inflation get so out of control?"

> A: "Two ways. Gradually and then suddenly."

The U.S. went off the Gold standard in 1973 and had different fed policy back then, is my understanding. I highly doubt "it was too late to prevent it" back then or that there are lessons to be learned from that incident or the fiction novel you quoted that apply today.

The US ended gold convertibility in 1971, not 1973.[a] The precipitating factor was actually OPEC's oil embargo from 1973 to 1974.[b] At the time, conventional economic wisdom was that there was a trade-off between employment and inflation, according to the Phillips Curve.[c] So, as higher inflation (and inflation expectations) started getting more and more embedded into the economy (e.g., stipulated in rent contracts), everyone could see what was happening, but everyone sort of kept waiting and hoping for things eventually to "go back to normal," so no one did anything... until Volcker came along and fought the establishment, causing a lot of pain, to get inflation under control.

[a] https://www.stlouisfed.org/open-vault/2017/november/why-us-n... -- also, see tastyfreeze's comment: https://news.ycombinator.com/item?id=27833523

[b] https://www.federalreservehistory.org/essays/oil-shock-of-19...

[c] https://www.stlouisfed.org/open-vault/2020/january/what-is-p...

I imagine you'd agree the U.S. has different monetary policy in the 1970s than it did today. I recall an expert say because the monetary policy has changed, discussing the 1970s isn't useful. I don't believe there's any question we have a different monetary policy today than we did in the 1970s.

The bond market is not predicting high inflation. I believe experts would say the 1970s are not relevant. So that's where we are.

The bond "market" is dominated by Fed purchases (with money created out of fresh air), to keep borrowing costs low (aka QE). They are following the BoJ, which now owns around 70% of all government bonds. This charade can continue for a while longer, but what happens when governments own 100% of their own debt and all mortgage debt (MBS in the US)?

Instead of relying on my own "ideas" on economics, a field I have no training in, I would simply stick to one of the two sources cited here for inflation predictions:

" There are two popular methodologies for predicting inflation. The first is to rely on the Survey of Professional Forecasters, the oldest US survey of macroeconomic forecasts by economists, and the second is to rely on the breakeven rate, the spread between the US Treasury yield and the yield for TIPS, as a measure of market expectations."

https://mailchi.mp/verdadcap/on-inflation?e=3cd9e40509

> The bond market is not predicting high inflation. I believe experts would say the 1970s are not relevant.

I think it is at least partially relevant that no one working in bonds in 2021 was working in bonds in 1971/1973 period discussed here. It is fun to talk about these past periods but it is very much theoretical for most traders and lessons are hard to remember in your own lifetime let alone from the lifetimes of predecessors.

I encounter this constantly in my profession, which is also heavily reliant on valuation and interest rates. No one in my field today has direct experience of rising interest rate environments since rates have been on a continuous decrease for decades. Even older folks that remember double digits rates still act as if rate can never go up again. They throw caution to the wind. As a result, the market is incredibly susceptible to issues if rates ever do go up. It is mind boggling.

The US went off the gold standard in 1933. Citizens could no longer redeem certificates for gold. The Bretton Woods Agreement was broken by Nixon ending gold convertibility in 1971.

The gold standard required government to have more gold to have more money. The gold standard was ended because it was a restraint on government spending.

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