The Wall Street Journal: The Bitter Fruit of Inflation: Dow 29500
Article by Arthur Laffer and Stephen Moore in The Wall Street Journal
The recent report showing negative economic growth for the first quarter of the year is a painful reminder of the damage that inflation can do. The current 8.5% inflation rate is the highest in 40 years.
But few policy makers or Federal Reserve governors seem to have learned the lessons from the last bout of surging prices—how it started, the economic wreckage it caused, and how we got out of it. We wince when we hear investment gurus arguing that because inflation often means rising consumer demand, it is good for the economy and stock market.
Really? Let’s rewind to 1974, the early stages of that long stretch of inflation. That year one of us, Mr. Laffer, wrote on these pages what became a controversial and influential article with the headline “The Bitter Fruits of Devaluation.” Inflation is, of course, a form of currency devaluation.
Two years earlier the Nixon administration had intentionally devalued the dollar in the mistaken belief that a cheaper dollar would spur growth and employment while reducing the U.S. trade deficit. The Laffer article warned that this policy would wreak economic havoc and cause a stock-market train wreck. That’s precisely what happened.
Those who suffered the most were middle-class workers hit by rising prices, especially for energy, surging way ahead of wage increases. Between 1972 and 1981—under Presidents Nixon, Gerald Ford and Jimmy Carter—hourly earnings for workers went from $4 to almost $7, a roughly 70% gain. But after accounting for inflation, workers were getting poorer because the purchasing power of wages fell by roughly 12%. Is it any wonder that Ford and Mr. Carter were voted out of office? That’s exactly what workers are facing today with wages up 5.6% over the past year but consumer prices up 8.5%. Then as now, the White House and the Fed said the inflation would be temporary and blamed it on global factors beyond their control.
What about the stock market and Americans’ wealth? Mr. Laffer’s warning of a bear market turned out to be spot on. As the nearby chart shows, the Dow Jones Industrial Average briefly climbed above 1000 in the mid-’60s and then bottomed out at 777 in the summer of 1982—a 22% reduction in stock values in nominal terms.
But investors, like workers, care about their real return. Adjusted for inflation, the industrial average (and the S&P 500) fell during that period by more than 70%—the worst .........
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